Rebound in Store for Shares of Potash Makers
Falling crops prices have dogged shares of potash producers in recent weeks, but the sell-off in these crop nutrient makers appears overdone and their shares look poised for a rebound.
Despite a decline in crop prices, analysts contend that global demand for potash remains strong, prices for the crop nutrient will remain at record highs, supply continues to be tight and new capacity is still a few years away.
"On a long-term view and on a fundamentals view, (I am) very comfortable with the outlook a year from now for the likes of Potash and other companies like it. We think they will be generating significant earnings," said Canaccord Adams agriculture analyst Keith Carpenter.
Potash helps to improve the size of kernels, seeds and fruit and is a key crop nutrient along with nitrogen and phosphate.
The bulk of the world's potash deposits are currently found in Canada, Russia, Belarus and Germany.
Potash prices have more than quadrupled within the last year and touched $1,000 a ton last month.
Potash Corp of Saskatchewan , Mosaic , Agrium , Intrepid Potash , K+S, Silvinit, Israel Chemicals, Uralkali all enjoyed strong share-price gains in the first half of 2008, but have seen their share prices drop about 30 percent or more since peaking in mid-June.
>> Click Here for Intrepid Potash's Quarterly Results
"We don't look at this sector as a bear market, we look at it as a correction and we expected the correction," said Terence Ortslan, managing director of TSO and Associates.
A recent workers strike at three of Potash's mines, which account for about 30 percent of the company's production capacity and about 5 percent of global capacity, could spur another spike in potash prices.
Furthermore, with U.S. regulators rejecting a proposal to lower the ethanol mandate for 2009, analysts expect farmers to increase their corn acreage in the coming planting season, a move that will likely boost potash demand in the United States.
Volumes Spur Growth
Potash price increases have propelled the shares of companies in the sector this year, but the big driver in 2009 is more likely to be gains in shipment volumes.
In North America, although potash demand remains fairly steady, increased corn acreage will be a factor in spurring volume growth.
Moreover, in 2008, China managed to secure contracts for only a fraction of the potash that it has historically imported.
Hence, analysts believe the Chinese will be forced to agree on next year's potash import contracts very quickly as inventory levels within the country are likely to at historic lows.
"The Chinese are not in the driver's seat here to negotiate from a point of strength, they need the volumes and they have no second choice," Ortslan said, adding that China is really in a spot.
China, the world's largest importer of the crop nutrient, was kept on a tight leash by producers this year.
The country, which typically imports more than 6 million tons of potash a year, was able to sign contracts for only about 2 million tons of potash deliveries this April.
"I think next year, we are going to see a bigger bump in volumes than in prices. Any price gains next year will be more marginal and more opportunistic, rather than fundamental," Ortslan said.
But, not everyone is convinced that potash demand for the 2009 crop planting season will remain as strong given the record high potash prices.
"The thing to remember is that farmers both here and abroad have not been confronted with these extremely high potash prices. The demand destruction will be substantial, but it has not occurred yet," said one industry expert, who asked not to be named.
Lars Chettche, of Frankfurt-based Metzler Equity Research cautioned that the potash markets are seeing a kind of bubble and that current potash price levels might not be sustainable in the long run.
However, even skeptics concede that with a tight supply situation and no new major potash capacity coming on-line in the next few years, it is extremely unlikely that the price of potash could collapse in the near-term.
Experts believe that a new greenfield mine that produces about 2 million tons of potash could take five to seven years to set-up and would cost more than $2.5 billion.
"No matter how you look at it, the world's inventory ratios for grain are dangerously lean ... So next year, we are looking at another very strong year of fertilizer application," said Ortslan.