Is This the Bottom for Potash Corp?


Following the collapse of the Belorusian Potash Company cartel earlier this summer, global potash players saw their shares plunge as it meant prices for the key fertilizer ingredient would plummet and with it the profit margins the producers enjoyed.

With potash pricing likely sinking as low as $300 per tonne next year, there's still more uncertainty on the horizon, meaning that while we probably haven't hit bottom yet, investors may want to seriously consider timing an investment now in Potash Corp , Mosaic , or the other fertilizer producers.


The breakup of the cartel between the Russian potash producer Uralkali and its Belarusian counterpart Belaruskali was a result of greater geopolitical forces than simply a disagreement over side deals for potash sales, as alleged. Russian President Vladimir Putin was said to be angry about Belarus' refusal to sell oil refineries and natural gas pipelines to his country, and because his rival is more dependent on potash exports than his own country is, he forced the breakup with the knowledge that depressed pricing would pressure Belarus more.

That country responded by inviting the executives of Uralkali to a meeting with the prime minister in Minsk to hash out a rapprochement and when Uralkali's CEO landed at the airport, he was promptly arrested and has been held ever since. The other executives were apparently smart enough to not show and Belarus is calling for a change in ownership at Uralkali as a condition for his release.

The fallout from the collapse, though, was immediate, global, and predictable. Because Potash, Mosaic, and Agrium were members of the smaller North American group Canpotex -- the Belorusian cartel accounted for 40% of world potash supplies and together with Canpotex they controlled 70% of the market -- their shares also came under pressure. Independent producers like Intrepid Potash that don't have the marketing muscle and negotiating might to wrangle better pricing deals were crushed, with Intrepid's stock losing 30% of its value in one day.

Unlike other commodities, potash doesn't trade on public markets so prices are instead set by producers negotiating with their customers. Now the Belarus economic minister has announced it will cut the price of potash to $300 per tonne next year, a significant discount to the average $379 per tonne price the fertilizer component realized in 2013 and a reversal for the country, since it insisted just two months ago it would not cut prices because it would result in losses.

While Belaruskali says the cost of production runs around $200 per tonne, it also believes the $300 level is merely the floor and prices will actually come in above that level next year. The wild cards in the deck remain China and India, two large importers of potash who, if their economies continue to slow, could exert additional pressure on prices. Yet China's sovereignty wealth fund recently agreed to take a 12.5% stake in Uralkali in a debt-for-equity exchange so that pressure can already be assured.

When Potash reported earnings three weeks ago, it showed the scars from the international intrigue. The company had previously warned it wouldn't hit its targets for the quarter, which proved correct. When the results were announced, revenues had tumbled 29% to $1.5 billion while profits were slashed 45% as realized potash prices fell from $429 a tonne to $307. Buyers were also holding off on making purchases just to see how much further they would fall.

The real beneficiaries are likely to be U.S. farmers, who've felt the pinch of artificially inflated fertilizer costs from the government-sanctioned marketing groups. Following a bumper crop in corn harvests this year -- corn is a particularly heavy feeder and requires lots of fertilizer to be spread for it to grow -- we may see the effects of this rivalry play out of several seasons at least.

There are still a lot of moving parts that could impact results, but I think most of them have largely been priced into the stocks of Potash Corp and Mosaic. I think the worst is over because there are still certain fundamental realities about food production and soil fertility that can't be ignored, and with Brazil still a major customer on the fertilizer market I expect we'll recovery sprout up in the months ahead.

More than a grain of truth
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