The dark clouds over the global potash market are getting thinner
Both the North American marketing cartel Canpotex (which represents PotashCorp, Mosaic and Agrium) and Uralkali were able to conclude supply contracts with China’s largest fertilizer distributor last week, Sinofert. Canpotex was able to secure a 700,000 tons supply deal with at a price rumored to be the same or very close to what Uralkali reported, USD$ 305/ton. Admittedly, these prices are not the USD$ 400/ton that was signed for the 2013 contract with Sinofert – and India. However, considering the shock that the BPC fallout caused to the potash market, worse scenarios could have unveiled.
Get our daily investorintel update
The end of the bipolar potash market, controlled by two cartels, has effectively changed the rules of the potash game. The end of cartel pricing power means that price floors can no longer be guaranteed. Nevertheless, potash prices could never have met the most bearish price expectations, which went as low as USD$ 200/ton when Uralkali pulled out of BPC. In fact, even if Uralkali sold more potash at lower prices – which was one of fears in the market – it would inevitably affect its own share price. In the new, freer, market regime, prices have become more amenable to market rules and more sensitive to actual demand. This has put factors such as production and operational costs – CAPEX and OPEX – all the more important.
Potash Corp’s shares (NYSE: POT) promptly rose on news of the contract and analysts, the very same that were so quick to downgrade the sector last summer, just as promptly moved their rating from “market perform” to ” outperform”, raising the new price target from USD$ 30 to 37. The news also renewed the enthusiasm of potash investors who had been waiting in the sidelines, disappointed by last year’s declines. The Chinese contract was their opportunity to get back into the potash game. Moreover, analysts from Raymond James have suggested that the gap between Uralkali and Belaruskali has started to close, which will translate to stronger discipline on the supply side and possibly a renewal of the BPC marketing agreement – or an agreement between Uralkali and PotashCorp, which would gradually re-introduce some much missed pricing power. Given this development, many would-be and disappointed potash investors now have an attractive entry point to enter, or to return, to this commodity with a longer term view.
The other positive aspect of the new USD$ 300/ton deal is that it is very far from the dire predictions that were putting so much pressure on potash valuations; this price may well be the new ceiling. It’s low enough to attract new high-volume buyers, who were previously discouraged by prices that made potash too expensive to use, while higher demand markets in countries that have very aggressive agricultural policies, such as Brazil, higher prices are possible.
The sluggish potash prices, therefore, have proven to be completely unrelated to individual companies’ performance and much less an indication that demands for mineral fertilizers will diminish. Potash, phosphate and other commodities have been affected by the ‘viruses of economic uncertainty that affects any business with global market implications, which sends jitters at the slightest change. The breakup of the BPC cartel was once such change. In late 2008 and 2009, potash prices hit record highs, reaching upwards of USD$ 900 a ton. While acknowledging that in the past two years prices dropped from about USD$ 500/ton to the now evident USD$ 300/ton, it should be noted that prior to the record highs, potash cost less than USD$200/ton. Therefore, potash investors’ expectations had been driven exceedingly high in a very short period. The failure to achieve high expectations leads to disappointed analysts, who are all too pleased to short and downgrade.
The cliché that people need to eat and that therefore fertilizers will continue to be in demand may be old and abused, but it is true. There can be no doubt that mineral fertilizer will remain an in-demand commodity. Individual producers will have their own set of special advantages. Some of the most evident are the production costs, or is how much it costs to deliver the mineral from the extraction to the market. Location is therefore important, as is the target market. Companies securing off-take agreements will have strategic advantages, as will companies with particularly keen domestic markets for potash and phosphate such as Brazil. China, India and Brazil are expected to remain the main importers of potash and consumers of phosphate – though Africa will also become ever more important, especially if the International Financial institutions start to endorse subsidizing mineral fertilizers for the continent. Economic growth, evolving diets and population growth in these regions will ensure demand for mineral fertilizers for many years to come.