Mosaic setting bullish tone for potash in 2015

imagesYZNFRHQ1Mosaic (NYSE: MOS) is expected to announce significantly higher profit (the presentation will be on February 11), for the fourth quarter than expected thanks to thriving sales of phosphate products. Mosaic’s results suggest that the potash majors can experience a bullish start to 2015. Mosaic’s performance confirms a bullish trend in mineral fertilizers already noted at the end of 2014 when Mosaic’s German competitor, K + S AG, also announced having exceeded its Q4 profit expectations forecast for the fourth quarter thanks to strong autumn/fall business. Meanwhile, Mosaic hinted that phosphate sales and profit margins in phosphate and potash are likely to be higher than the previous forecast with potash sales will be at the upper end of the forecast range. Mosaic sold 3.3 million tons of finished products – far more than the Company had predicted in late October (2.5 to 2.8 million tons). In the potash sector, Mosaic had expected sales of some 2.0 to 2.3 million tons. “The demand for potash and phosphates exceeded our expectations in the fourth quarter,” said CEO Jim Prokopanko. Interestingly, sales were high because many customers have anticipated a strong spring season and rising fertilizer prices and Mosaic expects the strong demand trend to continue throughout 2015.

Mosaic’s shares are likely to benefit from the forecast increase establishing a bullish course for the other major mineral fertilizer producers. Mosaic is a member of Canpotex – the marketing organization representing Saskatchewan’s three largest potash producers: PotashCorp, Agrium and Mosaic. Last week Canpotex signed a Memorandum of Understanding (MOU) for new three year potash deal with China’s Sinofert. Under the terms of the MOU, Canpotex will supply at least 1.9 tons of potash to Sinofert until December of 2017. Pricing will be negotiated every six months–January to June and July to December, “based on market conditions”, and the current price is USD$ 305/ton. The price is not as high as hoped, but it is also not as low as feared and the agreement is expected “to encourage future growth in new Canpotex product grades and new market regions in China as it provides exclusivity to Sinofert for Canpotex red standard grade potash only, provided Sinofert exercises the annual minimum purchase requirements.” Canpotex’s rival, Uralkali had tried to secure higher prices from Sinofert (USD$ 340/ton) last November, only to meet strong resistance from Chinese buyers. Uralkali was trying to compensate for losses deriving from the shutdown of the Solikamsk-2 potash mine, due to a massive sinkhole.

The shutdown has not slowed Uralkali, which announced that it had beaten “its own production target” for 2014 as the company compensated loss of production at Solikamsk by increasing output at its other facilities. Nevertheless, the fact that Canpotex was still able to secure a price of more than USD$ 300/ton is testament to the resilience of the potash market. Indeed, the price set for the Chinese contract tends to set the tone for the year. The India contract is also an important indicator of the potash market and the Government of India is rumored to be considering lifting import duties for fertilizers, which would make products such as potash, phosphate and urea more affordable to farmers while benefiting Potash Corp, Mosaic and Uralkali among others. One of these others is Germany’s K + S AG whose shares have performed very well since the end of 2014, remaining among the top performers in the DAX. There is a sense, beyond the individual Company results, that the potash sector will see a sustained recovery scenario for 2015; the fertilizer market has already proven to be more solid and encouraging than 2014.  The price of corn is especially low (USD$ 3.50 a bushel – it has been as high as USD$ 8 according to RBC). Any lower and it will cost more to produce than to sell. The ‘natural’ forces of supply and demand will unleash their magic and restore a modicum of balance, pushing crop prices higher. There is also the issue of global fertilizer demand continuing to increase. For the past decade the big drivers of potash prices have been China and India.


Sinkhole swallows Uralkali’s profits and boosts potash rivals

sinkholeRussian fertilizer giant Uralkali (LI: URKA), just a year after shaking the potash market by terminating its strategic pricing alliance (BPC) with the Belarusian potash concern Belaruskali announced that it has been struggling with a temporary closure of a major mine, Solikamsk-2, located near Perm. Should the problem turn out to be a long term or even permanent failure there is the risk that the Russian potash producer will incur significant losses. Of course, this could benefit the competition and cause a significant price hike in the price of the popular mineral fertilizer. The mine affected by the shutdown is of considerable importance for Uralkali, covering a fifth of the company’s capacity. On Tuesday, production at Solikamsk was stopped after high levels of brine were discovered. Water dissolves the potash salts (potassium-laden salts) damaging a mine’s structure and causing sinkholes. This is not unusual for Uralkali, but this time the scale of the problem has been more severe than usual. In 2006, Uralkali suffered a similar incident in the same region and the closure lasted a very long time causing a 5% drop in production (but not as great a financial loss, given that potash prices were typically below USD$ 200/ton then).

The market’s reaction was immediate: Potash Corp (NYSE: POT) gained 6% percent in New York, an intraday jump not seen since 2012 while its CANPOTEX ‘cartel’ partners Mosaic (NYSE: MOS) and Agrium (TSX: AGU) enjoyed similar increases of 4.4 and 4.1 respectively. Indeed, Uralkali did not venture to suggest how long it would need to fix the problem and this is also good news for the smaller potash producers such as Germany’s K+S Group and even for potash juniors such as IC Potash (“ICP’, TSX: ICP | OTCQX: ICPTF) and Allana Potash (TSX: AAA | OTCQX: ALLRF). These juniors are among the nearest to production stage of all the new potash companies. The breakup of the BPC potash cartel that was announced on July 30, 2013, resulting from OAO Uralkali’s decision to ‘go it alone’ had shaken the potash sector.

Investors and sector executives alike feared a collapse of the sector with prices falling below USD$ 200/ton. Nevertheless, the market dynamics triggered by Uralkali’s move may have benefited the overall potash sector by lowering prices in the short term so as to increase them in the long term. In this sense the 25% average drop in potash shares in reaction to the Uralkali bombshell, helped make potash more affordable for those many potential customers who have stayed away because of prohibitive economics. The chance to sample the goods and see the agricultural benefits will have generated more demand while emphasizing the value of ‘project economics’.  Now, the favorable economics for the emerging juniors and production capacity of Uralkali’s international competitors, will raise potash’s value as an investment commodity. Should Uralkali fail to control the flow of brine, it could lose up to 30% of its net profit in the coming year. Meanwhile, the prospect of a tighter supply on the world market is expected to help fertilizer manufacturers to charge higher prices in the forthcoming negotiations with India and China, which usually take place between December and January.

In July 2013, Uralkali adopted a new strategy of pushing production levels higher to bring down prices of potash and conquer new markets, sacrificing margins in the process. That decision led to a stock market collapse of major industry players, who were accustomed to controlling and adjusting production to support prices. China had already been slated to pay 10% more for the 2015 contract to secure its supply of potash. Uralkali’s drop will surely play in favor of CANPOTEX and that price increase will surely be greater than 10%. Increasing tensions between Russia and the West will also raise potash prices. After Canada, Russia is the world’s largest producer of potash. The country also provides 7% and 8% of the supply of fertilizer phosphorus and nitrogen. Brazil has been gradually increasing potash imports used especially to grow soybeans, used for food and fuel. Demand has increased steadily from 2012 to 2014 while areas used to plant soybeans are expected to grow 4%. Already, fertilizer orders for the first half of 2014 gained 7% over 2013, and a corresponding increase is expected in the second half of 2014.

Western agricultural and potash sectors suffers more from anti-Russia sanctions than Russia itself

imagesLU2BVI6VRussia has delivered a textbook response to the growing list of sanctions that the West and NATO countries have adopted, with more or less conviction, over its inevitable interventions in the Ukrainian civil war. Russia has banned food imports from several Western countries including Italy, Germany and Canada. It has also banned Western investment projects in the Russian agro-food sector just as Russian food tastes and consumption habits have been expanding to include a wide variety of products. From the Western perspective that Russia should modernize politically, the sanctions will have adverse effects, delaying that very process of modernization, forcing a resumption of cultural and political insularity. Russia will put planned projects on hold or cancel them outright, hurting Western companies in the process.

Western companies – especially German and Italian – have been providing the modern technologies and know-how to modernize the Russian agriculture and processing industry. Germany alone has invested over a billion Euros in Russian agribusiness, which have enabled Russia to vastly improve ​​plant production, resuming its role as a primary exporter of wheat along with the USA, the EU and Argentina. The increase in the production of wheat and other crops has also allowed for improvements in poultry and pig production, which has raised demand for such minerals as potash and phosphate. Meanwhile, as late as 2013, several European small and medium enterprises in the agricultural sector had asked their EU representatives to significantly expand their corresponding commitments in Russia, facilitating ties further. The crisis and the Western (especially from the EU) promise to include Ukraine in NATO or even the EU have contributed greatly to the crisis. Not surprisingly, trade relations and problem-resolution mechanisms must be in place to build trust in trading partnerships and now both are in short supply. It will be difficult, but the EU must pursue a more diplomatic line with Russia in order to avoid completely cutting political level discussions and opportunities to continue working in favor of Russia’s agricultural and food industry modernization, which benefit western companies directly.

The Russian government has chosen to ban imports of several food products from the EU and the USA not only as a means of political pressure, but also to highlight their positive impact on the development of Russian agriculture and food industry. It is therefore in the mutual interest of all powers concerned that the Ukraine conflict does not escalate further.

The effects of the embargo imposed by Russia have already been felt. Entire containers of EU food products have been blocked and sent ‘back to sender’, while Russian importers are advised have been terminated several contracts for the shipment of fruit and vegetables. The list of banned products covers the entire range of diets and tastes including beef, pork, chicken, fish, seafood, milk and dairy products, fruits and vegetables from the EU, USA, Norway, Australia and Canada, with the exception of alcohol and children’s products. It is a sharp brake on the increasing demand for EU products on the dinner tables of all countries that made up the former Soviet empire that had begun to appreciate such gastronomic delights as Parmigiano Reggiano and prosciutto, not to mention all manner of oranges, grapes and legumes. In the first quarter of 2014, Russian imports of EU food products had actually risen in the first quarter of 2014. Countries such as Italy, which are relying on exports to lead the path out of the economic crisis, consider agriculture as a very important economic sector. It is estimated that Italy alone will lose over 200 million Euros in lost agri-business with Russia alone. Now we are facing a worrying escalation of the conflict with a trade war, which confirms the strategic importance of food especially during periods of economic recession. Russian leaders are master chess players and they have not chosen to target food imports casually; they are very aware that agriculture is a primary pillar of growth for the European Union at a time of economic stagnation. Indeed, worldwide agricultural exports from Italy alone grew by 5 percent in 2013, reaching a record high value of 34 billion Euros, even as other sectors suffered.

As for Canada, while Prime Minister Harper engages in smug tirades against Russia, the sanctions and growing trade ‘Cold War’ may have consequences for the potash sector. Russia is part of the block of BRICS (Brazil, Russia, India, China and South Africa) countries, all of which have high potash and phosphate demand driven by their respective agriculture and food sectors. As western borders close in response to decisions in Bruxelles, Ottawa or Washington doors open to Russia’s East and South. In potash terms, the world’s largest potash producer Uralkali expects to be able to implement price increases by as much as 10% in the 2015 supply contracts with China. Uralkali is considered the clock for the fertilizer industry, which also includes Canada’s Potash Corp of course.

The People’s Republic of China is the world’s largest consumer of potash and now pays Uralkali USD$ 305/ton. Technically, this should be good news for Potash Corp and its CANPOTEX partners (Mosaic, Agrium), but China may well decide to increase its share of supply from Russia in solidarity over Western sanctions. In turn, Russia will replace Western imports with meat and dairy products from Brazil, Argentina, Ecuador, Chile and Uruguay, which are more than willing to step up to the opportunity. China has also indicated that it can increase the supply of fruits and vegetables to Russia. Uralkali also has close ties to India and if it should see it advantageous, it could slash potash prices below contract rates, revamping the ‘quantity’ model by increasing production and undercutting CANPOTEX. Moreover, Russia may decide to trade in local currency when dealing with other BRICS members, further damaging the potash market.

Investors Resume Interest in the Mineral Fertilizer Market

Potash-Phosphate-Month-in-Review1-300x210The InvestorIntel Potash and Phosphate members rose collectively +7% for January 2014. While not exceptional in itself, the result is very significant as it serves as more than a hint that investors have resumed interest in the mineral fertilizer market. Last year, and particularly since the collapse of the Potash duopoly, when Russia’s Uralkali pulled out of the Belarusian Potash cartel, BPC, last July, Potash suffered an overall malaise felt by the agricultural commodities sector in general, making potash, phosphate and nitrogen overly sensitive to the slightest hint of  market uncertainty. However, as the potash majors (through CANPOTEX – PotashCorp, Agrium Inc., Mosaic – and Uralkali) signed more favorable than expected supply contracts with China’s Sinofert in January, the market was more willing to reward some of the juniors that have made important progress over the past few months. Two companies made a remarkable recovery, even if their valuations are still short of their potential.

IC Potash Corp. (TSX: ICP; OTCQX: ICPTF) announced the successful completion of an independent feasibility study for its 100% owned Ochoa Sulfate of Potash (SOP) Project in southeastern New Mexico. The study predicts an economically viable resource with a production capacity of 714,400 tons of SOP per year over a period of at least 50 years. The FS has confirmed the technical validity of the Ochoa project, which will now be able to proceed with gathering the necessary funds to build the mine. ICP will be able to produce SOP at about a quarter of the cost, demonstrating how crucial low operational and capital costs (OPEX and CAPEX) have become in the potash sector. IC Potash gained 18.52% at the TSX and 31.07% at the OTCQX.

Allana Potash (‘Allana’, TSX: AAA | OTCQX: ALLRF) gained 25.68% in Toronto trading and 16.01% at the OTCQX, returning to a price floor closer to last year’s average of about CAD$ 0.50/share. Allana is steadily moving toward start of mine construction, for which it has already announced that financing arrangements are well underway, securing about two thirds of the capital needed and the all necessary mining license – last October. Allana is one the potash companies that should be on everybody’s watch list in 2014. Its project in Ethiopia’s Danakhil region may well be the one best suited to benefit from the new potash market dynamics triggered by the BPC collapse. If potash prices actually do drop as predicted to below the current USD 350/ton (the test will come when Belaruskali signs its next contract with China) level, potash will become more affordable for those many potential customers who have stayed away because of prohibitive costs. Companies with favorable project economics such as Allana Potash – and IC Potash – have a head start. The breakup of the Russian-Belarusian potash cartel, BPC and its North American equivalent, Canpotex, had managed to maintain potash prices at levels of no less than USD 400/ton. The new low ceiling, as suggested by the Canpotex and Uralkali contracts of just above USD$ 300/ton are the new base. Nevertheless, there is more reason to be optimistic about potash prices in 2014.

Despite the recent turbulence in the mineral fertilizers, its long-term growth prospects are good. The world population continues to grow, which will translate in increased demand and the BPC a renewed alliance of Russia’s Uralkali with Belarusian state-owned enterprise Belaruskaly cannot be ruled out. The ‘potash war’ between Russia and Belarus has reached the ‘peace conference’ stage as former Uralkali CEO Vladislav Baumgertner was extradited to Russia and replaced by Dimitry Osipov, hailing from Uralchem​​. Essentially, Uralkali’s management has been reorganized in such a way as to ease tensions between Minsk and Moscow. Russia’s ambassador to Belarus, Alexander Surikov, has used very diplomatic tones with Belarusian authorities, taking some blame, hinting that a joint marketing venture such as BPC could be rebuilt, which would add some upward price pressure on potash, switching back the profit formula to lower volume and higher price. Moreover, Potash Corp. (NYSE: POT) recently announced that last year’s sales did not drop as much as expected and that the Company could see a gradual stabilization of the potash market at the end of the fourth quarter, given a market recognition that the basic conditions driving higher demand for fertilizers still exists. A higher demand for diammonium phosphate (DAP), since November 2013, suggests prices reaching the highs of last summer, given that available production has been sold out. The international nitrogen market is also showing stable prices…to access the Potash & Phosphate numbers for January 2014, log-in to InvestorIntelReport