Is the end of the lower potash prices in sight?
ProEdgeWire Potash and Phosphate Week in Review for June 17, 2013: The ProEdgeWire Potash and Phosphate advertorial member index dropped 4.91%. It was a rather puzzling week for investors in commodities such as phosphate and potash as some of their stocks hit yearly lows despite the fact the validity of their medium to long term prospects and some interesting developments in the potash sector itself.
The market situation remains rocky and even the hint of slightly bad news is enough to cause a drop in fertilizer shares, representing a reflection of individual companies’ performance or actual demand for fertilizer than they do a diminished confidence in the market as a whole. Nevertheless, potash and phosphate prices are still strong enough to sustain long term growth expectations. There has been strong interest in potash from China as witnessed by the Western Potash deal signed at the end of May. Not only has the deal confirmed China’s interest in potash assets and potash’s long term demand prospects, it has also uncovered India’s own attention to the sector. Western Potash (TSX: WPX) confirmed that it has signed a deal with China Blue Chemical, a subsidiary of energy giant CNOOC, which includes an investment of USD$ 32 million. The stock rose sharply in advance of the announcement and fostered renewed takeover rumors, which sustained the share price in the first days following the announcement. However, the increase was followed by a sharp price drop last week.
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The deal itself was seen positively on Bay Street and China’s interest represents a strong expression of confidence in relation to the Western’s Milestone project; indeed, it could attract more attention and possibly produce yet another partner for the project, possibly from India’s state-owned Rashtriya Chemicals and Fertilizers, which, earlier this year, had entertained talks with Western Potash’s competitor Encanto Potash (TSXV: EPV). Evidently, the potash sector drop for the week was prompted by more general fears, given the vivacity of the sector. Indeed, a recently published Ernst & Young report has suggested that the struggling TSX Ventures index reflects the a continued weakness in the global economy and that this is the main cause for the decline in commodity prices and the associated poor performance of the companies in this segment.
The report is not entirely gloomy; Ernst & Young also see opportunities in companies that have adapted to the new situation in preparation for the return to the ‘black’. Juniors have been especially hit by a situation of rising costs and declining revenues – or in the case of many of the developing potash projects, no revenues. While potash prices remain steady and above USD 400/ton, they contribute to discouraging new players while helping to sustain the well established producers such as Potash Corp or Uralkali.
Prices would have to rise to well above USD 500/ton for the emerging plays to receive ‘profitable’ attention from the market. Such prospects actually do exist and may not be too far away. Uralkali, which announced 18% lower Q1 revenues last week due to lower Indian and Chinese 2013 contracts, was very optimistic about potash demand and potash prices, based on a strong Russian domestic recovery and a higher than predicted demand in Brazil, which has proven to be one of the strongest potash markets this year. Demand in North America also increased in expectation of a late planting season. Phosphate prices have also remained high as farmers in North America and other intense agricultural industry regions have started to fulfill delayed purchasing projections. Brazil. China, India and Brazil are expected to remain the main importers/consumers of potash and phosphate – though Africa will also become ever more important, especially if the International Financial institutions start to endorse subsidizing mineral fertilizers for the continent. However, BHP Billiton has the keys to higher potash prices. Its decision as to whether or not to pursue the Jansen Mine in Saskatchewan should have a string impact and the shaky potash markets may well be a reflection ahead of the announcement. The Jansen project would be the world’s largest potash mine and it represents a major threat to the CANPOTEX- Belarus Potash (BPC) duopoly. BHP will make the announcement on July 1 but until then, fear of the consequences of its actions, will have a powerful effect on the performance of potash shares.