Producers of phosphate fertilizers started the morning of Nov. 3 beneath the cloud of the U.S. government potentially enacting duties on cheap Moroccan and Russian phosphate imports, which Florida-based Mosaic Co. believes would place a premium on U.S. production.
By noon ET on Nov. 3, the future of their market looked bleaker, with Saskatchewan-based Nutrien Ltd. declaring an $823 million noncash impairment associated primarily with the value of its phosphate assets in the U.S. As Mosaic executives on an earnings call talked up the potential for a $50-per-ton price increase quarter over quarter on its phosphate products in the last three months of 2020, Nutrien President and CEO Charles Magro offered a more pessimistic view of the market on a simultaneous investor call.
"The reason for the impairment, to be very candid ... is that we have a view that the market has a lot of fundamental oversupply in low-cost jurisdictions around the world. And that supply will only continue to increase," Magro said on the call.
Through the second half of 2020, the U.S. government has mulled whether to use trade actions to limit foreign imports of phosphate fertilizer from Morocco and Russia, at the request of Mosaic. In August, the U.S. International Trade Commission concluded there was a "reasonable indication" that U.S. producers of phosphate fertilizer were "materially injured" by these imports, which are allegedly subsidized by the governments of the two nations and drag U.S. pricing downward.
The U.S. Commerce Department plans to make a preliminary decision by Nov. 23 on whether to enact any import duties. Mosaic has said it expects the case to be fully wrapped up by the first quarter of 2021.
Mosaic CEO and President James O'Rourke said Nov. 3 that the upcoming Commerce Department decision would "simply" be about whether there will be a formal trade action of some kind. If a high duty is implemented, trade flows could change to account for the premium on U.S. production, including increased Moroccan and Russian shipments to Indian and Brazilian markets as well as Mosaic redirecting or diverting tonnes of fertilizer to U.S. markets, O'Rourke said.
Commenting on Nutrien writing down its phosphate assets, O'Rourke said it "is very difficult for me to see how the long-term phosphate outlook was the triggering event for this write-down." The executive poured cold water on any comparisons between the two companies and their phosphate fertilizer products, declaring it is "very difficult to compare them one-to-one."
"First of all, we're very different in scale, but we also sell very different products," O'Rourke said. "I don't think you can compare the two businesses, and I certainly don't think phosphate demand and supply, at least for fertilizers, is a factor in that."
The prospect of trade action appeared to support higher phosphate pricing during the third quarter, but it is unclear whether duties would be maintained by a potential Biden administration should the former vice president win the U.S. presidency, S&P Global Ratings analyst Paul Kurias said in an interview. While the duties may not impact the credit ratings of fertilizer producers, equities managers may keep it in mind, the analyst said.
"From a credit point of view, we need to know that any actions that are taken now are actions that are going to hold on a sustainable basis. Is there potential for change in the stance adopted vis-à-vis trade if there is a new administration? We're trying to look out beyond that. We're viewing everything through that lens," Kurias said. "If it does cause a spike in pricing and in profits, it's not something we get too carried away by. We take a longer view. But there might be other constituents in the market for whom this might be extremely important."
If President Donald Trump wins the election, it could create a "positive short-term reaction" for Mosaic because the company would avoid potentially higher taxes and other risks, VTB Capital analysts said in a Nov. 2 note. But a Democratic victory "implies serious downside risks including higher taxes, more expensive ammonia and less support to the [agricultural] sector," VTB Capital said, noting that a plan to "provide clear support" to agricultural producers is absent from Biden campaign material.
Mosaic reported an attributable net loss of $6.2 million for the third quarter, dropping year over year from a loss of $44.1 million. Citing the impairment of its phosphate assets, Nutrien said it booked a net loss of $587 million for the quarter, swinging year over year from net earnings of $141 million even as sales ticked up 1%.