K+S Sees Sharp Drop in 2016 Earnings Amid Weak Potash Prices

  • Ebitda may fall as much as 55% as German plant outages weigh
  • Canadian project output seen delayed to second quarter 2017

K+S AG, Europe’s biggest potash producer, said earnings could drop by about half this year amid weak prices for the crop nutrient, setbacks in production in Germany and lower demand for de-icing salt.

Earnings before interest, taxes, depreciation and amortization are forecast at 500 million euros ($558 million) to 600 million euros, compared with 1.1 billion euros last year, the Kassel, Germany-based company said in a statement on Thursday.

The shares fell 9 percent to 18.07 euros at 12:04 p.m. in Frankfurt, taking the drop since the start of the year to 23 percent.

Chief Executive Officer Norbert Steiner’s plan to cut costs and focus on growing the specialty fertilizer and salt businesses has not compensated for a further drop in global prices for potash, used by farmers to bolster root systems and protect against drought. K+S has also been hit with by worse-than-expected factory outages and a decline in North American demand for de-icing products made with salt.

Potash Slump

K+S, which extracts potash in Germany and is developing a new mine in Canada, also has a salt unit and owns the Morton Salt brand in the U.S. The company’s maintaining its medium-term target for about 1.6 billion euros in Ebitda by 2020, based on assumptions including that potash prices return to 2015 levels.

“The company does not believe that the current weakness in the potash market will last as the medium-term and long-term growth trends remain intact,” it said in Thursday’s statement.

Click here for Bloomberg Intelligence research on agricultural chemicals

While global demand for potash is likely to be slightly lower than 2015’s level, contracts signed by the major potash suppliers with Chinese and Indian customers around mid-year should stimulate global demand in the second half, K+S said. The company expects that the market will have bottomed this year, Chief Executive Officer Burkhard Lohr told analysts on a conference call.

China Benchmark

India and China typically sign accords at the start of each agriculture year to buy the nutrient and the price China agrees with the biggest miners is a benchmark for suppliers and customers around the world. K+S achieved an average portfolio price in its potash and magnesium unit of 250 euros per ton in the second quarter, compared with 310 euros a year earlier, the company said.

While the forecast range provided for 2016 earnings assumes flat potash prices over the rest of the year, the company’s optimistic that markets will improve in the second half, Lohr said.

K+S reported a 20 percent decline in revenue for the first half of the year, to 1.8 billion euros, while so-called operating earnings dropped 53 percent to 233 million euros, the company said. Operations were affected by production standstills at its Werra potash plant in Germany, where the company faces limitations in disposal volumes of waste water while it waits for authorities to decide on a key permit.

K+S is investigating alternative saline water disposal options, including in mines and caverns, and Lohr said he expects to see some progress on the crucial deep-well injection permit by the end of the year. Without the permit, sales volumes would come in at the bottom of the company’s forecast of 6.2 million to 6.4 million tons for the year, he said.

K+S has been dogged by legal woes over its disposal of waste water from its mining operations in central Germany. Prosecutors in the town of Meiningen said in March that they charged 14 people at the company, including Steiner and other members of the management board, with polluting waters from 1999 to 2007 by colluding to illegally produce licenses for the disposals. K+S maintains that the permit it obtained was lawful.

At the company’s large new Legacy mine in Canada, first production will be delayed until the second quarter of 2017, rather than later this year, after a process vessel came loose and dropped to the ground. Commissioning of the plant will still begin this month and the company’s still targeting a production rate of 2 million tons a year by the end of 2017.

It’s too early to estimate the cost implications of the incident, Lohr said. A new crystalizer will be built and installed by the end of next year.

K+S rebuffed a takeover approach from Potash Corp of Saskatchewan Inc. last year, only to face fresh challenges from an oversupply in the market.

Before it's here, it's on the Bloomberg Terminal.