Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Potash Corp. Facing Uncertainty

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

In life, a broken relationship is rarely fully repaired. In business the same often holds true. In either situation, caution is warranted.

This past summer, the Russian-Belarussian potash cartel BPC broke up, throwing the global fertilizer market for potash into disarray. Many potash producer stocks have been beaten down. One company that has taken a significant thrashing is Potash Corporation (NYSE: POT  ) , which has seen shares fall from its 52-week high of $44.30 to recent prices near $32.

This price drop has caught the eye of would-be value investors. I am here to tell you that there is no way to know whether Potash Corp. is a value play or a value trap at this point.

Here's what we do know. Uralkali's decision to break up its marketing and distribution agreement with Belaruskali, the jilted partner, has driven spot prices for potash down to about $325 per ton in China according to Bloomberg. Because China is a key player in global potash flows due to its geographic positioning and size, it, along with India, will be key to driving the profits of potash producers. 

The impact of what is going on in Russia has been swift. Potash Corp., according to its reporting, was on pace to export 6.4 million tons of potash in 2013, excluding U.S. sales. 71% of those exports, or 4.5 million tons, were expected to go to China, India, and other Asian nations, with most of the balance going to South and Central America. However, according to ICIS, Canpotex, the Canadian potash cartel which Potash Corp. is a 55% owner of, has not renewed some of its contracts with Asian customers.

The importance of the goings on in Russia cannot be underestimated. Over the years, BPC has worked in tandem, if not in cooperation, with Canpotex to maintain higher than market clearing potash prices. However, Uralkali has made a move, for now at least, to use all of its capacity, which is both low-cost and abundant, sacrificing unit price for higher exports.

According to recent corporate reports, Uralkali has quickly increased exports with 800,000 tons just in August, which compares favorably to the 1.9 million tons in the entire first quarter. For the third quarter, its year-over-year production is up 5%. It appears that virtually all of the increase in Uralkali's sales has come at the expense of the Canadians. 

Uralikali Director of Sales and Marketing Oleg Petrov has made it very clear they are aiming for a 2 to 2.5 million increase in annual production:

"We have a target to sell all the volumes we produce and this is possible by winning markets from international players in some regions who earlier had taken our market share."

A major disadvantage to competing in Asia for Canpotex and Potash Corp. is the high transportation costs for shipping potash across the Pacific. According to ICIS research, it costs about $67-$75 per ton to transport Canadian potash by Panamax freighter to China and India. Uralkali, with a cost of production near $100/ton and rail transport significantly less expensive than ocean freighter, is in position to take most Canpotex business in Asia. 

Further complicating Potash Corp.'s business outlook in China is that CIC, a Chinese sovereign wealth fund, has taken a 12.5% interest in Uralkali.

While Canpotex partners, Mosaic  (NYSE: MOS  ) , and Agrium  (NYSE: AGU  )  all stand to lose volume in Chinese, Indian, and Asian markets, Potash Corp. stands to lose the most as it derives 45% of revenue from potash sales. With a likely export miss and lower pricing, consider it already had a second quarter price received of $356 per ton, which was down year over year from $433, and it might be set up for a significant earnings miss. On October 10, the company revised guidance downward.

What is most relevant to investors is whether reduced exports and lower pricing portends a longer-term trend. If it does, then Potash Corp. is a value trap. If it is merely a short-term market adjustment, then Potash might indeed be a value play.

More precious than oil or gold?
The most precious resource in the history of the world isn't gold or oil. In fact, it’s more valuable than both of them. Combined. And here’s the crazy part: one emerging company already has the market cornered… and stands to make in-the-know investors boatloads of cash. We reveal all in our special 100% FREE report The 21st Century's Most Precious Natural Resource. Just click here for instant access!

Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2648113, ~/Articles/ArticleHandler.aspx, 10/1/2016 11:54:27 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 14 hours ago Sponsored by:
DOW 18,308.15 164.70 0.91%
S&P 500 2,168.27 17.14 0.80%
NASD 5,312.00 42.85 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 4:03 PM
POT $16.32 Up +0.10 +0.62%
PotashCorp CAPS Rating: ****
AGU $90.69 Down -0.07 -0.08%
Agrium CAPS Rating: ****
BBL $30.38 Up +0.32 +1.06%
BHP Billiton CAPS Rating: ****
MOS $24.46 Up +0.21 +0.87%
Mosaic CAPS Rating: ****