Rumors of Mosaic Potash (NYSE: MOS) becoming a takeover target and an upward swing in prices of commodities could prompt a renewed interest in the potash sector and potash prices. Moreover, other factors such as potash inventory levels in North America suggest potash demand will be rising.
The interest in Minnesota based Mosaic has been sparked by the expiry of restrictions, on May 26, for shares held by charities associated with Cargill, the agro-industrial giant that spun off Mosaic two years ago. This will allow all of Mosaic’s shares, estimated to be worth some USD$ 26 billion, to be put up for sale. Mosaic’s sale would be the largest potash deal ever and the sector could gain from ‘reflected’ interest. Mosaic, like its main North American competitor, is a member of the CANPOTEX pricing ‘cartel’ and second only to Potash Corp of Saskatchewan in North American potash production. Speculation of a takeover is being fueled by BHP Billiton’s continued interest in potash, after the Canadian government prevented it from taking over Potash Corp in 2010 and in view of the fact that its board has expressed support, but not yet approved, the greenfield Jansen potash mine. Potash shares are by most indications undervalued at present, which should further encourage takeover speculation.
The combination of factors is ideal for a takeover. Potash Corp itself could be interested, having seen its bid for Israel Chemicals rejected; however, BHP remains the prime candidate, as Potash Corp’s strategy is to secure easier access to India and China in order to compete more effectively against the Russian-Belarusian cartel BPC. Mosaic is an American held public company even as its potash assets are geographically based in Canada; this will allow it to avert any potential Canadian government restrictions – even though the climate appears to be less intrinsically ‘nationalist’ than before, given recent Chinese deals that were approved in the context of other strategic assets. Other prospective suitors may include Rio Tinto, which has investigated getting into the potash game, and Vale SA, which recently abandoned a major potash project in Argentina due to, what can be summarized as, excessive political risk.
Meanwhile, if takeover speculation will be healthy for the potash sector in general, with the size of the operation generating major market and media interest, Mosaic has not commented about any imminent sale or takeover prospects – though its shares gained more than 2% on Thursday morning. The Mosaic takeover speculation has started to gain traction just as copper prices have made major gains in the past weeks in response to growing Chinese demand. The bullish copper sentiment has reflected on to the commodities sector in response to signs that China’s economy could grow higher than expected in the second quarter 2013. China’s GDP expected to grow by two percent in the second quarter, driven by large infrastructure projects.
A drop in potash inventory levels suggests that demand for the fertilizer should rise. This is significant as the delays in the potash cartels, CANPOTEX and BPC, signing contracts with India and China, led to a buildup of inventory, which impacted potash prices negatively. The fact that inventory levels started dropping suggests that prices should start rising. It is true that India cut subsidies for fertilizers last week but the cycle of fundamentals is shifting in favor of higher potash prices. High crop prices are one of the drivers for potash demand and these peaked in 2008 at the height of record oil and food prices. Inventory was los and supply tight. The immediate post-financial crisis period saw a drop in demand and low crop values. Uncertainties about China’s economic growth have kept potash companies’ stock prices low in the first months of 2013; nonetheless, the revised upward Chinese growth projections suggest potash demand is slated to increase.