Written by Abdul Davids – Portfolio Manager
Nutrien is a Canadian-based agricultural chemicals company that was formed following the 2018 merger of Agrium Limited and PotashCorp. It has grown to become the world’s largest provider of crop inputs and services, with close to 20 000 employees and operations in 14 countries – reaching every major growing region in the world.
Key demand drivers for fertilisers and agricultural chemicals are population growth, rising incomes and growing urbanisation that reduces the availability of arable land for food production. We unpack how Nutrien plays a critical role in ‘feeding the future’ by helping farmers increase food production in a sustainable manner.
Agricultural retail: the bedrock of Nutrien’s profits
Nutrien owns some of the oldest and lowest cost potash mines in Canada, annually producing and distributing over 25 million tons of potash, nitrogen and phosphate products for agricultural customers worldwide. The company’s agriculture retail distribution business is the largest segment (charted below) by way of revenue and profits, with a global reach and dominant market shares in North America and Australia.
The company has spent just over $1 billion on purchasing retail operations over the last five years, currently comprising over 2 000 locations across North America, Australia and Brazil. Nutrien’s retail operations offer farmers a complete range of seed, liquid and dry fertiliser products; primary crop protection products (including herbicides, insecticides and fungicides); specialty nutrition products; and a host of related services and solutions for more efficient farming. In addition, they have over 3 600 agronomists and farming specialists working directly with farmers to optimise crop yields, to implement more efficient farming methods and to improve on sustainable farming practices.
As farming is notoriously seasonal and cyclical, with periodic droughts and unfavourable weather impacting negatively on demand and income, Nutrien’s global geographical footprint reduces and diversifies their risk and exposure to single adverse environmental phenomena.
Nitrogen: economics are favourable
Nitrogen is a fundamental building block of plant proteins and is therefore essential for improving crop yield and quality, as well as animal nutrition. Ammonia is a concentrated source of nitrogen and the basic feedstock for all upgraded nitrogen products, that are used as a direct application fertiliser and to make industrial products. The most widely used nitrogen fertiliser is urea, which is also the primary raw material input for industrial products such as plastics, resins and adhesives.
Nutrien is the second largest global producer of ammonia (annually producing close to five million tons of nitrogen out of nine facilities in North America and Trinidad, with a total capacity of around seven million tons) and one of the lowest-cost producers of nitrogen fertiliser. Ammonia is primarily consumed close to the regions in which it is produced due to the high cost of transportation. As such, Nutrien’s North American plants are situated near customers and have access to low-cost natural gas feedstock. This creates a competitive advantage for the company in the US. Its proximity to growing agricultural markets in South America additionally creates a valuable avenue for future growth.
Phosphates: a key link between N & K
Phosphates, or phosphoric acid, represents the ‘P’ in NPK1 fertilisers and is an essential element that allows plants to absorb nutrients to grow optimally. While the phosphates division is Nutrien’s smallest segment (5% contribution to group profits in the last financial year), it sells a range of phosphate-based products including diammonium phosphate (DAP – the world’s most widely used phosphorous fertiliser) and monoammonium phosphate (MAP – a key ingredient in fertilisers, fire extinguishers, optics and electronics). Nutrien produces 5 million tons of phosphate-based products annually, while global phosphate demand is at roughly 70 million tons.
1A fertiliser’s N-P-K ratio is the proportion of three plant nutrients in order: nitrogen (N), phosphorus (P) and potassium (K). The product’s N-P-K numbers reflect each nutrient’s percentage by weight.
Potash: potential aplenty in Canada
Southern Saskatchewan contains the western world’s largest deposit of potash resulting from the geological formation of a layered sequence of halite (rock salts) and other evaporite minerals called the Prairie Formation. The potash extracted from the predominantly sylvinite ore is mainly used as a fertiliser. The unique feature of this potash deposit is its uniform, almost undisturbed formation over a vast area – occurring at a depth of around 1 000 metres and extending for almost 300 kilometres into North Dakota. The evenly formed, 3-metre-thick deposit enables bulk, mechanised mining and efficient extraction of the potash ore. This creates a natural low-cost production advantage for Canadian potash producers (tabled below left).
The top three potash producing countries account for 60% of global production, with Canada at the helm and enjoying the largest share of available reserves. Nutrien and Mosaic, Canada’s top two producers, currently account for approximately 20 million tons of potash production per year.
Nutrien has seven potash facilities, with a total capacity of 22.6 million metric tons. However, 2020 saw the company producing only around 12.9 million tons, representing a 57.5% capacity utilisation rate. Nutrien purposefully restrains its production of potash in order to play a decisive role in keeping global potash supply, demand and inventory levels in balance. This enables a stable and predictable pricing environment for customers. The right chart below highlights the large global potash producers and their relative production cost position.
Belaruskali and Uralkali, two Belarussian producers, have been impacted by European and US sanctions resulting in Belarussian potash exports declining to 11.8 million tons (1.5 million tons to Europe, 0.7 million tons to the US and the remaining 9.6 million tons mainly to Asian and South American countries). Mosaic, a key North American producer, has experienced a loss of close to 0.7 million tons of potash production due to flooding. The subsequent decline in supply, coupled with robust demand growth has resulted in potash prices rising to multi-year levels, as indicated below left.
Nutrien’s current cost of production (approximately $58 per ton of potash) stands in stark contrast to potash pricing at present (around $550 per ton). While we do not expect the current high potash prices to be sustainable, the company is enjoying record profitability and increased exports to meet customer demand.
Corporate activity illustrates Nutrien’s value
BHP Limited, the world’s largest mining company, made a $43 billion bid for PotashCorp in 2010, but this was thwarted by the Canadian government. The PotashCorp/Agrium merger of equals valued PotashCorp at $17 billion in 2018, with Nutrien’s (new company) market value of $34 billion reflective of the merger values of the two companies at the time. BHP recently announced that it will proceed with its delayed Jansen potash mining project, with a total price tag of almost $12 billion for the anticipated annual production of around 4 million tons by 2027. This would imply a capital value of close to $3 000 per ton. In contrast, Nutrien’s current market capitalisation implies its 22.6 million tons of capacity has a value of only $17 billion, ie $752 per ton.
Despite a 20% increase in revenue and an almost doubling of profits since 2018, Nutrien’s market value has languished over the last three years, significantly underperforming a strong recovery and rebound in the potash price (below right).
Robust outlook warrants investment
Dominant positions in key potash and fertiliser markets coupled with a stable and growing retail footprint are key Nutrien attributes. In addition, the company’s exposure to compelling demand drivers for its fertiliser products makes Nutrien an exciting investment proposition for investors.
