In 2013, the potash market turned into something of a soap opera. A key industry partnership came to an end, customers took to the sidelines to watch the carnage, and prices for this important fertilizer fell. And the drama isn't over as the new year gets under way.
The shares of PotashCorp (NYSE: POT ) and Mosaic (NYSE: MOS ) both fell nearly 20% in 2013. Most of that pain was felt after a European pricing consortium broke apart around the middle of the year. That fallout led the price of potash lower and squeezed margins at the industry's big players.
During the third quarter conference call, PotashCorp CEO Bill Doyle explained that "the recent slowdown in potash demand and decline in pricing have been challenging..." So challenging, in fact, that the company announced in early December that it would reduce its workforce by 18% and shut mines. The end goal being to align supply with near-term demand and to protect margins.
However, in the same news release the company reiterated its belief in the "long-term drivers of [its] business..." Essentially, a growing world population and improving economic conditions in emerging markets will lead to increased food demand. Fertilization, using such key nutrients as potash, is one of the best ways to increase crop yields to satisfy that demand. That trend hasn't changed because of the falling out at the European consortium.
However, the price drop, which helped reduce Mosaic's top line by nearly 28% in the third quarter, could be nearing an end. That's largely because of management changes that were recently made at the former European partners -- changes that could lead to the two former friends mending their broken partnership.
That wouldn't be surprising, since the price drop in potash has hurt everyone in the industry. That said, more conservative investors should note that Agrium (NYSE: AGU ) has been able to sidestep much of the pain because of its more diversified business model. The company sells fertilizers, seeds, pesticides, and owns a chain of agricultural stores. In fact, fertilizers only account for about one-quarter of Agrium's business.
That doesn't mean that Agrium won't be happy to see the European consortium get back together, just that its business isn't as dependent on fertilizer sales as PotashCorp and Mosaic. But PotashCorp's decision to shut production suggests that even a return to "normal" in the industry won't be enough to boost prices.
Interestingly, fertilization is a scientific issue -- adding more than the "right" amount doesn't do any good (it can even hurt yields). So, lower prices don't really lead to more sales, it just means less revenue. And PotashCorp's decision to cut production was driven by lower prices and "...developing markets where growth has been less robust than expected."
Although that's likely a near-term issue, since the long-term trend is still for more people and higher incomes, it suggests that 2014 could be another rough year for the fertilizer industry and specifically potash. So not only do you need to keep track of dance partners in the potash market, but you also need to keep a keen eye on the nations that are seeing the biggest population growth and economic development.
That means watching China and India, among others. Notably, China and India have been slowing down of late. And if that slowdown lingers, it could spell bigger problems for potash. That's because new mines are in the works from outsiders like BHP Billiton. Although the mine is years away from completion, when it does open it will simply put more pressure on prices if demand doesn't increase fast enough.
Really long term
So 2014 isn't likely to be a good year for potash miners. That, however, could be a long-term buying opportunity if you are a contrarian investor and buy into the long-term growth story. PotashCorp provides the most direct potash exposure, with Mosaic coming in a solid second. If you're more conservative, Agrium's diversified business may be more interesting. That said, you'll need to keep a close eye on all of the changes taking place across the fertilization market -- and 2014 looks like it could be just as drama filled as 2013.
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