First Japan, then China. Is India next? No, I'm not talking about my travel plans, but about potash-importing countries that are in buying mode again after a hiatus, thus raising hope for fertilizer companies.
Canpotex, the three-member legal cartel controlling all potash exports out of Saskatchewan, just bagged a contract from Sinofert, China's biggest integrated agriculture company. That's something the cartel's members -- PotashCorp (NYSE: POT ) , Mosaic (NYSE: MOS ) , and Agrium (NYSE: AGU ) -- had been looking forward to. Why? Because the fertilizer industry has been dogged by a lot of concerns lately, primarily a dip in crop prices and production cuts by some of the biggest players, including the members of Canpotex.
Getting back on track
After temporarily shutting down two potash facilities at Saskatchewan, PotashCorp closed its third potash mine in February for some weeks. Mosaic is also reducing its potash production by nearly 20% in the first half of the year, citing cautious buyer behavior and lower expected demand. Companies around the globe felt the jitters, with the world's largest potash producer, Uralkali, also lowering output in the first quarter in anticipation of delayed contracts from India and China.
With the Sinofert contract, things seem to be falling back into place. Canpotex will supply 500,000 tons of potash to Sinofert in the forthcoming quarter. The tonnage can go up by another 200,000 tons if the need arises. This deal comes after Japan signed a pact with Canpotex and China awarded Uralkali a contract for 500,000 tons.
I had earlier told you that issues such as production cuts seem to be temporary hiccups. These contracts have only strengthened my argument.
The news I'm waiting for is a contract from India, which is an important market for the cartel. Nearly 20% of Mosaic's potash is marketed to India, according to Business Standard.
I don't think India is going to watch from the sidelines for long. First, India keeps a close watch on the prices at which China signs potash contracts. China will pay Canpotex the same amount ($470 per ton) as last year, which is much lower than what Japan agreed to ($550 per ton). This could tempt India. Second, India is intensifying efforts to inform farmers about the benefits of using potash. From a broader perspective, India's need for fertilizers will only rise as crop production goes up in tandem with its burgeoning population.
If you think low-priced contracts would mean lower profits for PotashCorp, Agrium, and Mosaic, the potash currently under shipment to India is priced $60 per ton higher than during the fourth quarter of 2011. So I don't see any drastic fall in the average full-year potash contract prices for these fertilizer companies. The Saskatchewan government itself expects this year's potash revenue to be 50% more than it was in 2011, as higher prices help balance out flat sales volumes.
The Foolish bottom line
With contracts pouring in, things are looking brighter for the fertilizer space. Most fertilizer players did well last year, and I don't see much reason to stay away from these stocks. I suggest you add them to your Watchlist. It's a free, personalized stock-tracking service from The Motley Fool to keep you updated on all your favorite companies.
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