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It's been a while since Uralkali broke its partnership with Belaruskali and decided to pursue the strategy of putting more potash to the market. Since then, shares of potash producers like Mosaic (NYSE: MOS ) and Potash Corp. (NYSE: POT ) have remained under pressure.
Hopes that this was just a temporary condition and Uralkali would soon rejoin the cartel with Belaruskali were not realized. The story turned into a soap opera. In its latest act, a criminal case against Uralkali's CEO Vladislav Baumgertner was opened in Russia. He was charged with abuse of power by the Belarusian government, and now would be extradited to Russia.
Let's take a closer look at Mosaic, which recently cut its forecast for 2013 global potash shipments. The company estimates global potash shipments of 54 million to 55 million tons, down from its previous estimate of 55 million to 57 million tons. The company has also lowered its global phosphate shipments outlook by 2 million tons.
As of now, Mosaic has two big problems: potash prices and the situation in India. Potash prices greatly depend on Uralkali's moves. I strongly believe that investors should not turn themselves into Kremlinologists and try to predict how the story ends. Instead, it's safe to assume that potash prices will remain under pressure for some time.
This fact has become obvious for Potash Corp., which revised its third-quarter earnings guidance. The company now expects to report a profit of $0.41 per share. Just a month ago, analysts were expecting earnings of $0.51 per share.
Agrium (NYSE: AGU ) , another potash producer, has stated that soft prices, combined with lower sales volumes, would negatively affect its third quarter too. The company is confident in its future and plans to make a sizable potash expansion that would increase its production capacity from 2 million tons to 3 million tons in late 2014. This would bring more product into an already oversupplied market. I do not see it as a well-timed move.
India is a source of worry for Mosaic too. The country has an enormous population, but this doesn't translate to great nutrient sales. The fall of the rupee made import nutrients very expensive for Indian farmers. In addition to that, Mosaic has company-specific problems there. The company states that it has only limited infrastructure in India, with just 300 employees.
More importantly, the company waits for the government to act in favor of the farmers. Mosaic states that the next election will take place next year, and it expects that the government will address farmers' problems some time after that.
In the longer term, the picture looks brighter. The global population is rising, and all these people need to eat. Grain consumption is growing annually by 2%. The improvement in the quality of life of Chinese people leads to increased meat consumption, and meat is grain-intensive in production.
However, the price of potash depends on the situation with supply and demand. Currently, there is more than enough supply, and the demand is not growing. If the potash market does not return to its cartel-like existence, potash prices will likely remain near current levels.
Putting it all together
What's the takeaway for an investor from this? You shouldn't rush into Mosaic, Potash Corp., or Agrium. Low prices are here to stay. The situation with Uralkali will take time to resolve, and these businesses could be negatively affected by low prices and unstable demand.
Shares of these companies may seem cheap after they've dropped around 20% this year. However, I think that we could see more downside in these names.