Interest rates are majorly influenced by inflation rate and monetary policy. Therefore, the two economic factors will be evaluated to project the movement if interest rates. Growth in developed countries is expected remain modest. Therefore, IMF projects that developed economies, including the USA, will apply an accommodative monetary policies to spur economic growth. Businesses will benefit from the expansionary monetary policies through a reduction in the retail interest rate as well as access to a wider pool of loanable funds.
The inflation rates in the USA and other developed countries has remained close to zero and negative in some economies. On average, the inflation rate was 0.3 percent in developed economies. It is at the lowest level after the global financial crisis. The low inflation was as a result of a decline in commodity prices and oil prices by 32 percent. The core inflation was also fairly stable between 1.6 to 1.7 percent. The graph below shows the inflation rates.
Source: IMF
The core inflation is still below the US fed targets. Therefore, an intervention is not expected. The IMF projects that the inflation will remain relatively unchanged in 2016. Based on the projected inflation rates and anticipated monetary policy, interest rates are expected to remain low. The low interest rates will translate into low finance costs for Compass Mineral. Compass Mineral can also access cheap funds to facilitate international expansion and diversification through global acquisitions.
Global Salt Production
China and the US dominate the world production of salt. However, Chinese salt production is almost double that of the USA. The Chinese salt production in 2015 was 70 million metric tons which is 26 percent of global production while that of the USA was 48 million metric tons which is 18 percent of global production.
The Salt production in China has a great bearing on the Compass Minerals as well as the entire industry. Most of the salt production in China is along its sea coast. Roughly, 80 percent of the salt deposits in China are close to the sea. Therefore, China uses the solar evaporation process to manufacture its salt. Solar evaporation is less costly since it relies on energy from the sun. The process is labor intensive rather than capital intensive. This favors China because it has an oversupply of cheap labor. In the USA, only, 36 percent of salt production is from rock salt. Therefore, China has an edge over its American competitors. Besides, China experiences an overproduction of salt to the tune of millions of tons. Consequently, due the laws of supply and demand, the price of salt is low in China. The salt industry in China is heavily controlled by the government. Salt production is controlled by a few state firms. This allows it to benefit from scale economies to a level that American companies cannot enjoy. The low unit costs can be passed to consumers in form of lower shelf prices. The government of China has also invested in enhancing the technology applied in salt production so that the quality of salt that is produced is comparable to that of any advanced economy. The Chinese government also heavily subsidies salt production that is meant for export to allow its firms to compete favorably on the global market. These factors are likely to give Chinese salt manufacturers an upper hand against American salt manufacturers in the global market. However, in the USA, domestic American firms still enjoys dominance because Chinese firms face trade barriers in form of tariffs. Besides, Chinese firm would incur transport costs to access the American market which would raise their unit cost. The salt industry is likely to be unaffected in the American market. However, in the global market sales forecast of common salt (sodium chloride) is bleak given the competition from Chinese firms. Compass Mineral has diversified into plant nutrients markets which is likely to cushion its overall performance from revenue dips from the sale of common salt. The company acquired a 35 percent stake in Produquimica which is a leading firm in the specialty plant nutrients market in Brazil. Therefore, the company will be able to tap into the large Brazilian market.
Plant Nutrition Market
Compass Mineral has continued to diversify by expanding into the plant micro nutrients market segment. The segment accounted for 22 percent of revenues in 2015. The company offers several grades of potassium based fertilizers. Expansion in the market has been through global acquisitions. The company projects that investments will allow it to achieve its targeted EBITDA growth. Demand in the sector is largely influenced by global grain and food supply as well as macro-institutional policies. Compass Minerals believe that the observed growth in the plant nutrients markets is likely to persist. A similar projection is made by FAO. FAO argues that the expected easing of food prices coupled with a growing population is likely to sustain an increase in demand for fertilizers. The graph below shows the historical and projected global demand for all fertilizers.
Source: FAO
The expected growth will translate into higher revenues for Compass Minerals. Although historically, more than 90 percent of the plant nutrients have been within the domestic market, the company has positioned itself strategically to tap into the international market through acquisitions.
Works Cited
Compass Minerals. Compass Minerals to Acquire 35% Stake in Leading Brazilian Specialty Plant Nutrition Company. 2016. Web. 2 May 2016.
IMF. World Economic Outlook: Too Long too Slow. Washington DC, 2016. Print.
Salt Institute. Production and Industry. n.d. Web. 1 May 2016. <http://www.saltinstitute.org/salt-101/production-industry/>.
Sedivy, V. "Can China emerge as a major player in the Asia-Pacific salt market?" Chemical Business. n.d. Web.
Statistica. Major countries in salt production worldwide from 2010 to 2015 (in 1,000 metric tons). n.d. Web. 1 May 2016. <http://www.statista.com/statistics/273334/global-production-output-of-salt/>.
