PotashCorp Ready to Make a U-turn

Following on the heels of Russian potash producer Uralkali announcing contracts to sell the fertilizer ingredient to customers in India for $322 per tonne, the North American marketing group owned by Agrium (NYSE: AGU  ) , Mosaic (NYSE: MOS  ) , and PotashCorp (NYSE: POT  ) announced that it, too, had reached a similarly priced agreement with its Indian customers. Although that's 25% below what the trade group realized last year, it represents the lowest price received in seven years -- it sets the stage for the coming recovery in the fertilizer's price.

After Uralkali made a bid for market share last summer by breaking away from its partner Belaruskali, thus sundering the powerful Belarusian Potash Corp. cartel, potash pricing went into free fall and PotashCorp saw its average realized price fall from $424 per tonne in 2012 to $332 per tonne at the end of 2013, and it estimates its received pricing for potash this year may fall as low as $240 to $270 per tonne.

In January, China established the floor for the industry by agreeing to buy from Uralkali potash at a price of $305 per tonne. That too was a recent record low, though it had been about where analysts anticipated it would land -- even if there was a collective sigh it didn't break through the $300 per tonne level. Now the market appears to have stabilized, and despite depressed pricing at the moment, that very fact could spur rates of potash application and move the demand cycle up once more. 

India farmland is of very poor quality, and though its population has a large share devoted to farming, it largely occurs at subsistence level. Moreover, potash imports to the country fell after the government reduced subsidies for its purchase to help bolster a nascent domestic nitrogen market, which together with slack sales to China and a stagnant global economy, led PotashCorp to announce job cuts in December amounting to 18% of its workforce. 

The new agreement by the fertilizer group Canpotex should help stabilize its three owners as well. PotashCorp estimates its potash production represents 19% of global capacity; Mosaic, which says potash represents about 28% of its net sales, accounts for 14% of global production; and Agrium, which is less exposed to potash than its peers as it relies instead on nitrogen products for about half of its sales, says potash production counts for less than 15% of revenues.  

It also gives new life to plans by rivals to use Canada's vast potash resources to participate in the industry's expected growth. Canada is home to half the world's potash deposits, and the Jansen deposit in Saskatchewan in particular could become one of the world's largest potash mines when finally operational. With global production limited to just a handful of countries, the Canpotex agreement suggests that the industry has found its footing and Potash, as the largest of its owners, can concentrate on moving higher once more.

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