Potash price shocker: short-term dive or new pricing paradigm?

Short term tumble or new paradigm?

Kate Wilkinson 1

Potash prices, fertilizer companies and analysts alike received a shock Tuesday as Russia’s Uralkali, the world’s largest potash producer, pulled out of its Belarusian Potash Company (BPC) agreement, leaving a murky view of the potash industry’s future and several unanswered questions.

The global potash duopoly of Canpotex and BPC (which together control the majority of the world’s potash exports) seems to have disintegrated for the time being, sending individual Canadian potash company shares spiralling down.  Shares of Potash Corp. and Mosaic Co., Canada’s largest potash producers, both tumbled about 20 per cent after Uralkali forecast that its actions, including a plan to ship more potash to China, would result in a US$300 per tonne potash price, a far cry from the usual floor price of US$400.

Urakali CEO Vladislav Baumgertner has stated in a company message that BPC partner Belaruskali broke the terms of a corporate agreement when the government of Belarus “cancelled the exclusive right of BPC to export Belarusian potash” in December 2012. Apparently unable to find a solution, Baumgertner described the current Urakali-Belaruskali relationship as a “deadlock.”

Fai Lee, a research analyst with Odlum Brown “can’t recall a time” when share prices took this much of a tumble in one day, except for the 2008 financial crisis, during which shares dropped “for different reasons.”

“This is extremely surprising,” he added, noting that the potash industry had previously been more concerned with a potential shake-up from Australian mining giant BHP, who have proposed but not confirmed whether they’ll go ahead with a new potash mine in Saskatchewan known as the Jansen Project.

In a research note, AltaCorp Capital analyst John Chu lowered his 2013-2014 forecast for Potash Corp. “on the back of our lower potash price assumptions and the associated lower margins,” and downgraded the company to “underperform.” Chu’s target price for the company’s shares dropped to US$30 from US$42.

The signs are ominous—Potash Corp.’s prices were already under pressure after disappointing second quarter results. But analysts say that it’s too soon to tell if a long term paradigm shift in the industry is really underway, or whether this is all just a short term shake-up.

Current share prices are likely reflecting the fear in the market that Uralkali’s forecast for a drop in potash prices will ring true.

“One of the key strengths of the potash industry for producers was their ability to remain disciplined as far as pricing,” said Cantor Fitzgerald research analyst Peter Prattas.

“Certainly without that duopoly being in place, and especially as Uralkali has announced that they’ll be increasing their production—thus adding supply into the market—we will see a short term drop.”

In Paradigm Capital analyst Spencer Churchill’s estimation, a cut to short term profitability might be a “sacrifice” Uralkali is making “to try and get their former partner back on side.”

Baumgertner’s statement included the message that Uralkali “do not exclude the possibility of cooperation on a mutually beneficial basis in future [sic]” with Belaruskali.

“So they didn’t shut the door completely,” said Churchill.

“I think that’s an indication that this is hopefully more of a short term negotiating tactic than a long term shift in the fundamentals.”

Still, the current volatility is a sign that investors with short term goals in mind might want to sidestep the inclusion of potash stocks in their portfolios for the time being.

“We would wait until pricing settles and/or any clarity as far as the duopoly being restored” before buying in, said Prattas.

“In the mid to long term, assuming the Russians and Belarusians do eventually mend fences and get back together again, this is still a very attractive industry to be in. Even at $300 per tonne in potash pricing, potash is still making a lot of money,” added Churchill.

“There’s still lots of money to be made, it’s just a matter of whether you’re a short term, mid-term, or long term focused investor.”

One comment on “Potash price shocker: short-term dive or new pricing paradigm?

  1. Just sell to selected Companies, enough to keep the Industry viable, and when the end-users cannot keep up with production because of a potash shortage, they will soon come around to a reasonable deal. In no way shouls the province give in to Corporate blackmail . Potash is an asset for all of the people of Saskatchewan!

    Reply

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