Dreading supply challenges, Nutrien to boost fertilizer production next year
Saskatoon firm plans to fill demand amid sanctions on Russia and Belarus
Nutrien Ltd. said Tuesday it would accelerate plans to increase fertilizer production, signalling it sees continued disruption in the global food supply chain for several years to come amid sanctions on Russia and Belarus.
In a conference call with analysts, interim chief executive Ken Seitz said Russia's war in Ukraine has stifled the global market for many agricultural and fertilizer products, and his company will step in to fill demand with plans to increase both potash and nitrogen production significantly next year.
“We are discussing the supply challenges in the context of 2022,” Seitz said on the call. “However, we believe these issues could extend well beyond this year. Sanctions on Russia and Belarus have the potential to create more lasting changes to global trade patterns as customers prioritize reliability of supply.”
Canada and the United States, among other countries, imposed sanctions on Russian exports after the invasion of Ukraine in February. Belarus has been under sanctions since 2020 amid election irregularities and human rights abuses.
Together Russia and Belarus represent about 40 per cent of global potash exports, and Seitz estimated global potash production would decline to as low as 60 million tonnes this year. Statistics Canada estimated 2020 global production at 69.2 million tonnes.
Nutrien reported a record $1.4-billion in net earnings in the first three months of 2022, up from $1.2 billion in the fourth quarter of 2021, which it attributed to higher commodity prices.
The Saskatoon-based company also increased its full year guidance for adjusted EBITDA to $14.5 billion to $16.5 billion — a 45-per-cent increase at the lowend from February when it expected $10 billion to $11.2 billion — and announced it would increase its annual potash production in 2022 to 15 million tonnes, up 10 per cent from 2021.
Nutrien, the largest potash producer in the world, operates six mines in Saskatchewan with a total annual production capacity of 20 million tonnes. Seitz said the company would continue to monitor whether it makes sense to ramp up production beyond 15 million tonnes, but noted this would require capital investments to install new infrastructure and equipment and increase its workforce.
“These are decisions that require careful planning as they have long term impacts on our operations,” he said, promising more details at the company's virtual investor update on June 9.
For some companies such as oil giant BP Ltd., which had operations in Russia, recent sanctions against the country led to billions of dollars in losses. But Nutrien's outlook, and recent results, suggest trade disruptions caused by sanctions are also creating economic opportunities for some companies.
Seitz started the call by expressing sympathy for people affected by the conflict. But he noted that Ukraine and Russia account for a significant portion of the world's supply of fertilizer and other agricultural products.
The global food chain is connected, Seitz said. As global grain and oilseed inventories decline, and the price of corn, soybeans, wheat and other key commodities moves higher, farmers' prospective margins on crops also move higher. That leads many farmers to plant more acreage and apply more fertilizer to capitalize on favourable market conditions.
While potash itself is not sanctioned, the cumulative effects of sanctions on banking, shipping, insurance and other parts of the economy are expected to trickle down and affect production.
Jason Newton, Nutrien's chief economist, said he expects potash production in Belarus in 2022 to decline by six to eight million tonnes, while Russia could face a two-million to six-million tonne decline. “It will take some time to rebuild those export capabilities,” said Newton, who added the two countries had been expected to add 60 to 70 per cent of the new potash supply projected to hit the market in the next five years.
Overall, Nutrien said the cumulative effect of the supply challenges and resulting higher commodity prices more than offset other headwinds such as a delayed start to the U.S. growing season, caused by rain, that brought in lower overall fertilizer sales volumes.
Seitz said many growers are looking for alternative sources of fertilizer, creating opportunities for companies such as Nutrien.
He added that the “phones are ringing ” at Canpotex, the Canadian firm responsible for selling potash production out of Saskatchewan, and where he previously served as chief executive.
“Suffice it to say that certainly from a global demand perspective, Canpotex has homes for potash and for increased levels of potash, and that's what's driving us, as we said in our opening comments, on looking at the potential to accelerate our ramp up of potash production,” he said.
Sanctions on Russia and Belarus have the potential to create more lasting changes to global trade patterns.