Don't Buy Potash Stocks on the Ukraine Conflict

Investors shouldn't expect sanctions on Russia to return potash prices to the artificial highs of the past. Even at the reduced prices, potash still generates higher margins than other fertilizers, suggesting limited long-term upside.

Mar 10, 2014 at 10:52AM

The conventional wisdom, or at least the knee-jerk reaction, appears to be that investors should buy the fertilizer stocks and specifically the potash miners due to the conflict in Ukraine. The theory is that potential sanctions against Russia could reduce the recent market share seized by the country upon the breakup of the Belarussian cartel and price cuts of the commodity to primarily gain contracts in China.

The breakup of the partnership between Belaruskali and OAO Uralkali, which controlled nearly half of the world market, had great implications for North American miners that are apart of the Canpotex marketing arrangement. Shares of Potash Corp (NYSE:POT), Mosaic (NYSE:MOS), and Intrepid Potash (NYSE:IPI) were crushed in the process due to the slashing of the high prices and large margins maintained by the arrangement.

The theory appears to have a lot of holes, however. These range from the concept that sanctions against Russia would include fertilizers needed for global food supply to feed the world to the idea that the primary potash customer of China would accept paying higher prices to obtain its potash from Belarus and Canada. This is especially problematic considering that the North American miners generated outlandish profits prior to the pricing collapse. It is hard to justify that sanctions could return the power to exhort market-leading margins.

Potash Corp would benefit the most
In the event that China actually complies with a sanction that would allow fertilizer and especially potash prices to soar, Potash Corp would be the major beneficiary. The company controls roughly 50% of Canpotex and had sky-high 50% gross margins for potash that shrunk to 40% during the fourth quarter of 2013. The other fertilizers produced by Potash Corp struggle to reach even the 40% gross margin level. The company's stock previously traded around $43 and collapsed to below $30 on the breakup in Russia. If anything, the recent stock price return to over $33 appears to be unjustified considering the structural change in the sector that isn't likely to return.

Both Mosaic and Intrepid Potash would provide secondary options to benefit from a return of pricing power. Mosaic obtains substantially more revenue from phosphates, but the potash business was nearly as lucrative with the substantially higher margins. In the fourth quarter alone, Mosaic recorded gross margins of 12% on phosphates sales of $1.6 billion and 21% on potash sales of $652 million. The gross margin for potash plunged from 41% in the previous year period.

Intrepid Potash is a risky small play in the sector, only generating revenue of $336 million in 2013. Due to lower pricing for potash and operational issues, the company generated a loss for the fourth quarter. Intrepid Potash is clearly at the mercy of the pricing arrangements obtained from the global players.

China controls the keys  
As with just about all global commodities outside of oil, the insatiable demand to modernize and grow the power of China has made the country the primary user of most major commodities. In that manner, the country can typically drive the price of commodities based on usage. Potash is no different, with the recent breakup of the Belarussian arrangement allowing Russia to snap up market share in China by offering lower prices. As of last October, Uralkali had dramatically increased market share in China to 73%; this was up from only 26% back in May.

Recently, Canpotex made news by signing a contract to deliver 700,000 tons to China. Considering that the pricing wasn't released, the general theory is that the North American cartel had to accept substantially reduced prices.

Bottom line
Investors should use great caution rushing into investing in fertilizer stocks on the back of expected sanctions in Russia. Any sanction would unlikely include potash that is needed to grow the world's food supply. Not to mention, China is a major customer that would unlikely accept paying higher prices. If anything, a cornered Russia might dump potash in China to obtain much-needed cash to fund the government under sanctions. The margins for potash are still higher than other fertilizers, suggesting an unlikely road to higher prices in the future.

Discover our top stock pick for the year ahead
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Mark Holder has no position in any stocks mentioned. The Motley Fool owns shares of PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information