Potash Prices Have a Floor But There Is Limited Upside Potential

The breakup of the Belarusian Potash Company (BPC) last year led to a huge drop in potash prices. Amid concerns that potash prices could drop below $300 per ton, shares of North American potash producers Potash Corp. , Mosaic Co. , and Agrium fell sharply last year. However, shares of all three companies have been recovering lately as potash prices seem to have found a floor. But, potash prices have limited upside potential as subsidy cuts in India, a key market, will keep demand in check.

Potash prices have a floor
The biggest concern for the potash market after the breakup of BPC was that prices would drop significantly. While prices did drop sharply, they never went below $300 per ton.

Russia's Uralkali, one of the partners in the BPC, agreed to sell 700,000 metric tons of potash to Chinese customers at $305 per ton earlier this year. It may be recalled that it was Uralkali that had decided to walk out from the BPC last year as it wanted to shift its strategy from price to volume. The fact that Uralkali agreed to a price above $300 ended a great deal of uncertainty over prices.

In fact, shortly after Uralkali signed a deal, Canpotex, which includes Potash, Agrium, and Mosaic, signed a deal to supply China's Sinofert Holdings with 700,000 metric tons during the first half of 2014. The North American cartel did not reveal the deal value; however, it noted that the deal was priced at current and competitive market levels.

Uralkali's and Canpotex's deals with Chinese customers created a floor for potash prices earlier this year. Not surprisingly, shares of North American potash producers reacted positively to this. Year to date, shares of Potash are up more than 8%, shares of Agrium are up more than 3%, and shares of Mosaic are up more than 4%. The S&P 500 has gained more than 2% in the same period.

Floor strengthened
The floor for potash prices was further strengthened after deals with India earlier this month. Uralkali reached an agreement with India to sell 800,000 tons of potash at $322 per ton. A few days later Canpotex agreed to an annual contract with India to supply around one million tons of potash at a price of $322 per ton.

Now that potash prices seem to have found a floor, there is far more certainty for potash producers. Also, as I noted in an article last month, there is a possibility for the BPC venture to be formed again. All these are positive developments for the potash market and make North American potash producers worth a look, especially Potash and Agrium as they also offer attractive dividend yields. Potash currently has a dividend yield of 3.94% and Agrium has a dividend yield of 3.17%. Mosaic has a dividend yield of 2.04%.

However, the outlook for potash producers is not entirely bullish, as there is limited upside potential for potash prices.

Subsidy cuts in India
India relies on imports for meeting its potash demand; however, local prices have been rising due to subsidy cuts and a weaker currency in the last two years. As a result, Indian potash demand has weakened. There were expectations that lower prices will boost demand from the country, which in turn was expected to boost prices, going forward.

However, that is not likely to be the case now as India has cut potash subsidies by almost a fifth to $160 per ton for the current fiscal year, which began in April. As a result, retail potash prices in India will remain high and any benefit from lower global prices will not be passed to customers. This means that at best Indian demand will remain steady. For potash producers that were banking on a rebound in Indian demand to boost prices, this is bad news.

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The article Potash Prices Have a Floor But There Is Limited Upside Potential originally appeared on Fool.com.

Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool owns shares of PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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