Foskor thinks strategy

Phosphate and phosphoric acid producer Foskor has come under much criticism lately for elevating the local price of phosphorus by charging import parity to local customers. But, according to Foskor CEO Alfred Pitse, the company now intends to completely scrap import parity pricing to its local customers. David Steynberg also spoke to him about the company’s social responsibility programmes and what will happen next year when Foskor lists on the JSE.
Issue date : 01 August 2008

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What will fertiliser prices do?
We’re looking at opening a new mine to increase capacity. So, when there is more capacity, the price will go down or it will stabilise. The reason phosphoric acid prices are where they are is because of sulphur. Last year in March, the price for sulphur was /t (R305), now it’s above /t (R610). At it cost Foskor R2 billion to import, now it costs R4 billion to buy sulphur. Sulphur is one of our biggest costs and it’s a byproduct of oil processing. When new oil projects come on stream next year, capacity will be increased and sulphur prices will come down and in turn fertiliser prices will decrease. So, we don’t expect huge increases next year.

Why do you think food andfertiliser prices are so high?
The arable land in the world is not expanding. The problem is that more and more land is being urbanised, meaning there is less land for agriculture. This necessitates that farmers are more efficient to satisfy global demand. In the past, China used to export a lot of its food, but because the population has become more affluent and eats meat, more grain is used to feed cattle and more fertiliser is used to grow grain. China also instituted a 135% export tariff on products to keep all the food in the country. That means there’s a big shortage that never existed before.

When Foskor goes public next year, will that cause fertiliser prices to increase as a result of market volatility?
No. Foskor is only responsible for the phosphorous in NPK. So that will not have any effect on the price of fertiliser.

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With the high price of fertiliser, do you foresee the local agricultural market switching from chemical inputs to more natural soil-care supplements?
Because fertiliser prices are so high farmers will start looking at alternatives, but they’ll still need NPK for soil health.

What is the Industrial Development Corporation’s involvement with Foskor?
The IDC is a developmental institution with a mandate to create jobs, develop SA, start new projects which will create new jobs and grow the economy. The IDC started Foskor in 1951 and it’s the only company in which the IDC has had a shareholding for so long. When their projects mature, they disinvest and use the money to start new projects.

Why has the IDC been with Foskor for so long?
If you look at the financials ending March this year we’ve got a shareholder’s loan of R1,45 billion. Without that Foskor would be closed. Because the IDC can’t use taxpayers’ money to create companies, it needs those companies to be self-sustainable. So, to pay back the shareholder’s loan, Foskor gave the IDC R500 million at the end of April, as well as at the end of June. We’ll pay back the balance of R450 million at the end of September.

Will Foskor encourage foreign or local investment when it goes public next year?
Because Foskor is a global brand and 75% of our revenue is generated from exports, it goes without saying that we will have interest from foreign investors. Despite being a strategic asset for SA, Foskor is also a generator of foreign currency for the country.

Do you encourage farmers to buy shares in Foskor next year?
Yes. We’re now in the process of appointing a transaction adviser who will tell us how much to sell our shares for. We’ll hopefully announce the price within the next month.
When you joined Foskor it was making a loss, but now it’s posting good profits.

Do you foresee it making more profits in the future?
When I joined in June 2003, the company made a R3 million loss, in the next year it lost R200 million, the following year it made a loss of R478 million and then in 2006 it started turning a profit. Currently there is more of a global demand than supply. Next year we’re opening a new mine in Phalaborwa at a cost of R500 milllion to increase capacity to 3,2 million tons, from our current 2,5 million tons. Also, from 1 August we won’t charge import parity to any of our local customers on all of our products.

How long will that saving take to filter back into the market?
It doesn’t necessarily mean that because we will charge less for our raw material, that the end consumer will benefit. Some 100% of potassium is imported and 50% of nitrogen is imported. The reason why the prices are so high is that we’re paying global prices for potassium and nitrogen.

Why is Foskor seen as a strategic asset?
Because Foskor has the only phosphorous mine in SA and if it is not run effectively, all the phosphorous will be exported and the country will suffer. We will always ensure that the SA farmer is properly looked after.

When supply meets demand, will prices come down and what will Foskor do to keep its shareholders happy?
Yes, in about 2012 Saudi Arabia will have completed a new phosphorous mine so around then prices will come down. But one of the other ways Foskor is looking to meet its profit margins is by diversifying to feed grades. Some 90% of phosphate rock around the world is used for fertiliser, while 10% is for industrial use, pharmaceutical products, animal feeds, food grade, etc.

Rumours why the phosphorous price is so high are that during the Eskom power outages Foskor fell behind and couldn’t uphold international contracts to supply phosphate rock overseas. So, it started exporting its rock to honour commitments, while not honouring its local customers. Is this true?
In Phalaborwa we’re mining about 2,5 million tons of phosphate rock. But for Foskor at the Richard’s Bay plant, we need 2,1 million tons. Sasol needs 600 000t and Omnia 100 000t. So, we need 2,8 million tons. We import 300 000t from Togo to meet the balance. To import, we pay 0/t (R3 671) and we sell it at 0/t (R2 065) to the local market. While we export rock to Japan from time to time, we first have to satisfy our own country’s needs. From the Richard’s Bay plant, we produce about 700 000t of phosphoric acid. About 500 000t goes to India and 50 000t to Europe, which leaves 150 000t. We sell about 20 000t to local customers, 130 000t is mixed with ammonia to produce 260 000t of DAP/MAP which we sell locally. The acid is mainly for export, not the rock.

Tell us about the social responsibility projects Foskor is planning.
At our board meeting in June we proposed three projects that we would like to get involved with, in light of the food shortages and as a part of our social responsibility programme. The first is peace gardens where existing and new subsistence farmers are to be given seed or vouchers to buy fertiliser. We will teach them how to use the fertiliser and how to grow vegetables efficiently. The second involves collaboration with the Fertiliser Society of South Africa, Grain SA and the South African Millers’ Association to give bursaries to students who want to study agriculture at tertiary institutions. The third involves our partner in India, Coromandel. They have what one might call a one-stop shop where farmers can have soil tested while they wait, among other things. This is something that we want to roll out in SA and we will bring in Coromandel’s expertise to help us.

Are these projects still in the planning phase?
They’re still in the planning phase. We hope that by the time we have our next board meeting in September, we will have a more concrete strategy. If we get approval we’ll start rolling them out and hopefully they will be active by next year.

Why is the grain and millers association on board with these projects?
Their concerns are the same as ours – high food prices. We had to explain why fertiliser prices are so high and because of our shared concerns we have decided to work together.

Would Foskor play more of a financing role?
No. We will probably appoint somebody at Foskor who will run with the social responsibility programmes, in collaboration with the other roleplayers. We don’t just want to give money and leave it there, but as far as possible, Foskor will join up with existing initiatives. We don’t want to reinvent the wheel. Contact Foskor on (011) 347 0600.