K+S CEO expects closures if Potash Corp. buys firm

European production costs higher in an oversupplied market, Steiner says

The chief executive of K+S AG suspects Potash Corp. of Saskatchewan Inc. will shut down much of his company’s European production if it gains control of it. Sources close to Potash Corp. dispute this notion.

It sets up an interesting debate that will grow fiercer if Potash Corp. launches a formal bid.

K+S, based in Kassel, Germany, formally rejected Potash Corp.’s US$8.6-billion takeover proposal on Thursday. And in an interview, CEO Norbert Steiner argued that a key logic of this deal for Potash Corp. is it could remove K+S’s highcost production from an oversupplied market.

By Steiner’s estimate, the potash market is oversupplied by roughly five million tonnes as Potash Corp. and other companies have spent billions to increase their capacity. If Potash Corp. bought K+S, he said, it would gain control of five million tonnes of production capacity (including the Legacy project in Saskatchewan, which should reach production next year).

In effect, this transaction could give Potash Corp. more control over the potash market and an opportunity to bring it closer to balance. If the company did idle production, Steiner is positive it would cut K+S’s capacity in Germany, since it is higher-cost than Potash Corp.’s output in Saskatchewan, much of which is either idled or due to come online soon. He thinks Potash Corp. would naturally favour its cheaper operations.

“There’s an imbalance at stake,” he said. “You are paying to acquire higher-cost production and leaving idle lower-cost production (in Saskatchewan). In the long run, this is something you need to resolve.”

Steiner said Potash Corp. has a particular interest in gaining control of the Legacy project, which is right in its backyard in Saskatchewan. While K+S plans to export the majority of its potash from that mine, it will look at opportunities to sell product in North America as well. That may be an unwelcome development for Potash Corp. and the other two North American producers (Agrium Inc. and Mosaic Co.) that dominate the domestic market.

“I think it seems to be attractive (for Potash Corp.) to have a hand on Legacy and to direct it in their way,” he said.

Potash Corp. had about 11 million tonnes of production capacity at the end of 2014. But that number should soar above 17 million tonnes in the years ahead as the company finishes off its US$8.4-billion expansion program. That will leave Potash Corp. with vast low-cost production capability in an oversupplied market, which raises questions about why it wants K+S and its higher-cost operations so badly.

While Steiner thinks it makes “little sense” for Potash Corp. to operate K+S’s German mines at their current levels, sources close to Potash Corp. said the company is keen to expand into Europe and diversify its product base. K+S has specialty products that command high prices, and Potash Corp. is also interested in the company’s salt business, the sources said.

K+S said Potash Corp. has made no commitments to protect jobs, despite comments from Potash Corp.’s camp that the company isn’t looking to shut German operations. Steiner said his company sent questionnaires to Potash Corp. with specific questions about job commitments but got only “vague” answers.

Joel Jackson, an analyst at BMO Capital Markets, said political and regulatory issues would make it extremely difficult for Potash Corp. to shutter production in Germany.

“I don’t think they could actually curtail European production right away,” he said.

He said if Potash Corp. bought K+S, it might make sense to produce enough potash out of Germany to serve Europe but replace K+S’s overseas sales with Saskatchewan output.