Market Overview
TFI Marketing Business Meeting
February 2016
MARKET OVERVIEW 02.08.2016
0
FORWARD LOOKING STATEMENTS
This report contains “forward-looking statements" (within the meaning of the US Private Securities
Litigation Reform Act of 1995) or “forward-looking information”(within the meaning of appropriate
Canadian securities legislation) that relate to future events or our future performance. These statements
can be identified by expressions of belief, expectation or intention, as well as those statements that are
not historical fact. These statements often contain words such as “should,” “could,” “expect,” “forecast,”
“may,”“anticipate,” “believe,” “intend,” “estimates,” “plans” and similar expressions. These statements are
based on certain factors and assumptions as set forth in this document, including with respect to: foreign
exchange rates, expected growth, results of operations, performance, business prospects and
opportunities, and effective tax rates. While we consider these factors and assumptions to be reasonable
based on information currently available, they may prove to be incorrect. Forward-looking statements are
subject to risks and uncertainties that are difficult to predict. The results or events set forth in forwardlooking statements may differ materially from actual results or events. Several factors could cause actual
results or events to differ materially from those expressed in forward-looking statements including, but not
limited to, the following: variations from our assumptions with respect to foreign exchange rates, expected
growth, results of operations, performance, business prospects and opportunities, and effective tax rates;
fluctuations in supply and demand in the fertilizer, sulfur, transportation and petrochemical markets;
changes in competitive pressures, including pricing pressures; costs and availability of transportation and
distribution for our raw materials and products, including railcars and ocean freight; risks and
uncertainties related to operating and workforce changes made in response to our industry and the
markets we serve, including mine and inventory shutdowns and suspensions; risks and uncertainties
related to our international operations and assets; failure to prevent or respond to a major safety incident;
adverse or uncertain economic conditions and changes in credit and financial markets; the results of
sales contract negotiations within major markets; economic and political uncertainty around the world;
risks associated with natural gas and other hedging activities; changes in capital markets; unexpected or
adverse weather conditions; catastrophic events or malicious acts, including terrorism; changes in
currency and exchange rates; imprecision in reserve estimates; adverse developments in new and
pending legal proceedings or government investigations; our prospects to reinvest capital in strategic
opportunities and acquisitions; our ownership of non-controlling equity interests in other companies; the
impact of further technological innovation; increases in the price or reduced availability of the raw
materials that we use; security risks related to our information technology systems; strikes or other forms
of work stoppage or slowdowns; timing and impact of capital expenditures; rates of return on, and the
risks associated with, our investments and capital expenditures; changes in, and the effects of,
government policies and regulations; certain complications that may arise in our mining process, including
water inflows; our ability to attract, retain, develop and engage skilled employees; risks related to
reputational loss; earnings; and the decisions of taxing authorities, which could affect our effective tax
rates. These risks and uncertainties are discussed in more detail under the headings “Risk Factors” and
“Management’s Discussion and Analysis of Results and Operations and Financial Condition” in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and in other documents and
reports subsequently filed by us with the US Securities and Exchange Commission and the Canadian
provincial securities commissions. Forward-looking statements are given only as of the date hereof and
we disclaim any obligation to update or revise any forward-looking statements in this release, whether as
a result of new information, future events or otherwise, except as required by law.
MARKET OVERVIEW 02.08.2016
1
EXECUTIVE SUMMARY
•
Global grain and oilseed consumption increased at an annualized rate of 2.2 percent over the
past 20 years. Demand has been resilient during periods of changing economic and agriculture
market conditions.
•
Crop margins have declined to more historical average levels following an extended period of
above-average returns. Current returns still provide an incentive for farmers to plant a crop and
supply the necessary nutrients to achieve high yields.
•
World potash shipments declined approximately five percent to around 60 million tonnes in 2015.
Demand in granular markets, primarily US and Brazil, was most impacted. We anticipate global
shipments in 2016 will be in the range of 59 to 62 million tonnes.
•
With very few potash brownfield projects being completed in 2016 and some operations going
offline, we see global operational capability staying relatively flat in 2016.
•
Lower energy feedstock costs in most key nitrogen producing regions have increased competitive
supply and weighed on the market. Several US nitrogen projects are expected to come on line in
2016, which could reduce import requirements.
•
Dry phosphate markets are expected to remain pressured in the early part of 2016 due to
weakened demand from India and Brazil, the two largest importing markets.
•
Liquid phosphate markets have been stronger in comparison to other fertilizer products due to
steady global demand, in addition to ongoing supply issues in key producing regions.
MARKET OVERVIEW 02.08.2016
2
Weaker FX Affecting Purchasing Ability and Production Costs
Currencies in several major agriculture and fertilizer producing countries have
devalued compared to the US dollar. This reflects the relative strength of the US
economy, country-specific fiscal and political issues and in some cases, the impact of
lower commodity prices.
The impact of weaker currency values on agriculture markets will vary by country.
Countries such as Brazil that export agriculture products can benefit from a weaker
currency, while those countries that are major importers of agriculture products could
face higher costs.
MARKET OVERVIEW 02.08.2016
3
Consumption Has Increased for 19 Consecutive Crop Years
Global grain and oilseed consumption has risen at an annualized rate of 2.2 percent
over the past 20 years. While production is more variable due to changes in crop
acreage and growing conditions, consumption tends to increase more steadily.
Consumption growth has been sustained during periods of changing economic and
agriculture market conditions. This past crop year marked the 19th consecutive year
of positive demand growth, which highlights the resilient nature of the agriculture
industry.
MARKET OVERVIEW 02.08.2016
4
Strong Correlation Between Crop Production Growth and Fertilizer Use
The most basic driver of fertilizer consumption is the need for global crop production.
The charts above illustrate the strong historical correlation between crop production
and fertilizer consumption.
Fertilizer consumption has grown at an average annual rate of approximately 2
percent over the past 20 years, with the rate of potash consumption growing most
quickly among the primary nutrients. Given the need to replenish soil nutrients
removed by record crops in recent years, we believe fertilizer consumption will
remain strong in the years ahead.
MARKET OVERVIEW 02.08.2016
5
Healthy Returns Continue to Support Acreage Expansion
Soybeans are an important revenue crop for farmers in Brazil. Harvested area has
increased by 50 percent over the past decade in response to rising offshore demand
and healthy grower margins.
In 2015, the Brazilian Real depreciated significantly against the US dollar, improving
the local price for agriculture commodities but increasing the cost of imported farm
inputs. Credit availability also impacted input purchases in 2015. Nonetheless,
soybean acreage continues to expand and we expect growth in safrinha corn
acreage during the first quarter of 2016.
MARKET OVERVIEW 02.08.2016
6
Crop Margins Have Reset
US crop margins have declined to more historical average levels following an
extended period of above-average returns. Farm input costs – including fertilizer, fuel
and more recently land rent – are now lower, partially offsetting the decline in crop
revenue.
Revenue for the 2016 crop year is projected to be well above variable costs, which
provides an incentive for farmers to plant a crop and supply the necessary nutrients
to achieve high yields.
MARKET OVERVIEW 02.08.2016
7
Expect Small Acreage Shifts in 2016
We expect small shifts in the US crop mix this spring, with potential for increased
corn, cotton and soybean acres given the sharp decline in winter wheat planting last
fall. We believe corn could increase to 89-90 million acres and soybeans to 83-84
million acres in 2016.
Overall we expect a small increase in total acreage for spring planted crops and
believe there is potential for strong spring fertilizer application following a shortened
fall season.
MARKET OVERVIEW 02.08.2016
8
Prices Decline During 2015
Challenging conditions, including currency weakness relative to the US dollar in
emerging markets, weighed on fertilizer markets in 2015. Cautious buying patterns
resulted in deteriorating prices across all three nutrients.
Global potash prices, particularly for granular products, were under pressure due to
lower demand in North America and credit issues and weak currency in Brazil.
Nitrogen markets felt the effects of a weaker energy price environment as feed stock
costs declined significantly in most key producing regions. Abundant supply from
China and other major urea exporting regions weighed on pricing.
In phosphate, record Chinese exports, seasonally slow demand in India and the US
and continued caution in Brazil weighed on prices for solid fertilizers late in the year.
Prices for liquid fertilizer products were more resilient, supported by strong demand
and tighter supply.
MARKET OVERVIEW 02.08.2016
9
Expect Growth in Global Potash Consumption
We estimate global potash shipments of approximately 60 million tonnes in 2015, a
decline of five percent from the record shipment level achieved in 2014 but still the
second-highest year on record. Although demand at the farm level remained
reasonably strong, higher distributor inventory levels, currency volatility and credit
issues in certain markets led to cautious buying patterns.
We believe a supportive and relatively stable crop price environment, coupled with
improved fertilizer affordability and agronomic need, provides incentives for farmers
to focus on soil fertility. We anticipate global shipments in 2016 will be in the range of
59 to 62 million tonnes.
MARKET OVERVIEW 02.08.2016
10
Expect Modest Growth in Most Markets in 2016
In 2015, potash shipments declined in all major markets except China, where total
shipments increased to record levels, boosted by significant imports in the fourth
quarter. We expect potash shipments to most markets will increase in 2016, largely
supported by consumption growth and lower distributor inventories.
Following a relatively weak year in granular grade markets, demand in North America
is expected to grow as dealers recharge inventories and farmers look to benefit from
improved affordability. In Latin America, healthy grower margins are expected to
support an increase in shipments, but the extent of the recovery could be limited by
credit concerns in Brazil.
In standard-grade markets, we expect positive consumption trends – especially for
NPK compounds – to continue in India, while shipments to other Asian countries
should remain at or slightly above 2015 levels. The exception is China, where
despite strong consumption trends, shipments are expected to be limited by elevated
inventories following a record shipment year.
MARKET OVERVIEW 02.08.2016
11
Expect Improved Demand in the Second Half of 2015/16 Fertilizer
Potash demand in North America during the first half of the 2015/16 fertilizer year
(Jul-Dec) was impacted by a shortened fall application season and lower buyer
engagement. However, we expect demand to improve in the second half of the
fertilizer year (Jan-Jun), supported by healthy crop acreage and lower dealer
inventory.
The pace of offshore imports has slowed in recent months and we expect this trend
will continue in the second half of the fertilizer year.
MARKET OVERVIEW 02.08.2016
12
Supply/Demand Balance Expected to be Similar to Historical Levels
The global potash operating rate declined slightly in 2015 due to lower demand and a
small increase in operational capability. With very few brownfield projects being
completed in 2016 and some operations going offline, we see global operational
capability staying relatively flat in 2016. Based on our estimate of global potash
shipments, we believe market fundamentals could tighten as the year progresses.
We project potash demand will grow at an annualized long-term rate of 2.5-3.0
percent. Operational capability is forecast to grow at a similar average rate over the
next five years, supporting a relatively balanced market outlook.
MARKET OVERVIEW 02.08.2016
13
PotashCorp’s Hammond Warehouse
PotashCorp has invested in logistics infrastructure to serve our customers better.
The first phase of our distribution facility in Hammond, Indiana was completed in
2012 and includes a rail yard with 14 miles of track which enables us to position
around 1,000 loaded potash cars closer to the market.
The project’s second phase builds on the strengths of the rail yard by adding a stateof-the-art warehouse that can store 120,000 tons of potash. We anticipate
commissioning of our new warehouse in the first quarter of 2016
MARKET OVERVIEW 02.08.2016
14
Feedstock Costs Have Decreased Significantly
Energy feedstock costs can account for as much as 85 percent of ammonia
production costs. Lower energy feedstock costs in most key nitrogen producing
regions have increased competitive supply and weighed on the market.
Natural gas markets that are linked to the price of oil, such as the European contract
markets, have seen the largest price decreases. At the same time, lower coal prices
in China have shifted the cost for these producers.
MARKET OVERVIEW 02.08.2016
15
Expect Stable Global Trade; Shifts in Trade Patterns
Ammonia trade is expected to remain stable in 2016; it’s anticipated that increased
export volumes from new capacity in lower cost regions will displace volume in some
higher cost regions. Exports from Iran are expected to increase as the country
benefits from easing trade sanctions.
US ammonia imports are forecast to decrease in 2016 as new domestic capacity is
scheduled to come online partway through the year. However, lower global ammonia
prices provide incentive for downstream fertilizer production and industrial demand to
support import growth in other key regions.
MARKET OVERVIEW 02.08.2016
16
Expect Stable Global Trade; Shifts in Trade Patterns
We expect global urea trade to remain near record levels in 2016 given the incentive
for importers to engage at lower prices. However, the US is likely to import less urea
amid the start up of new domestic capacity and India may back off from record import
volumes in 2015.
Although Asia and Europe are benefiting from lower feedstock prices, producers
there remain at the high end of the cost curve and current global prices may pressure
export-oriented producers. Reduced export volumes from Asia and Europe is likely to
be offset by new supply in lower cost regions such as the Middle East and Africa.
MARKET OVERVIEW 02.08.2016
17
Increased Domestic Production Will Pressure Imports
2016 marks a significant year for nitrogen capacity additions in the US. Greenfield
and brownfield projects commissioned in 2016 will increase domestic production of
ammonia, urea and nitrogen solutions.
The timing of commercial production from new capacity will be a key factor to watch.
Imports have declined compared to the previous year following a shortened fall
season and in anticipation of additional domestic supply. However, if projects are
delayed there is potential for a seasonal tightening in nitrogen supply.
MARKET OVERVIEW 02.08.2016
18
Declining Feedstock Prices Shift Cost Curve Lower
The global DAP/MAP export cost curve shifted lower in 2015. This is a result of
declining prices for key raw materials including ammonia and sulfur. Compared to a
year ago, the price for phosphoric acid is down about 10 percent while ammonia and
sulfur are down approximately 35 percent. Weaker currency values have also impact
production costs in many producing regions.
China is the largest phosphate exporter by a wide margin but is also at the higher
end of the global cost curve.
MARKET OVERVIEW 02.08.2016
19
Majority of Capacity Developed in China, Saudi Arabia and Morocco
China has emerged as the world’s largest phosphate exporter following an
aggressive expansion program. Since 2010, China has accounted for more than 60
percent of global capacity additions. The pace of expansions is expected to slow and
environmental issues, rock quality and non-integrated producer costs will be key
factors to watch over the medium term.
The majority of new capacity in 2016 is expected to come from Morocco and Saudi
Arabia late in the year. Most of the new phosphoric acid capacity is associated with
downstream processing facilities.
MARKET OVERVIEW 02.08.2016
20
Offshore Imports Have Slowed in 2015/16 Fertilizer Year
As the market adjusts to lower domestic capacity, imports have become an important
seasonal supply source. Moroccan and Russian producers continue to be large
suppliers to the US, while China has emerged as a major new supply source.
US dry phosphate imports were at a record level in 2014/15 due to strong demand
and a decline in domestic production capacity. Given the market caution that
developed in 2015, US imports have trailed the record set in 2014/15 but remain
strong on a historical basis.
MARKET OVERVIEW 02.08.2016
21
MARKET OVERVIEW 02.08.2016
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