Price Floor Seems to Be Set for Potash Exporters

Prolonged potash price weakness has being weighing on shares of potash exporters Potash Corp. (NYSE: POT  ) and Mosaic (NYSE: MOS  ) since the breakout of the sales alliance between Uralkali and Belaruskali. Fears that prices will continue to fall further shadowed profitability perspectives for potash producers. However, there are signs that the price floor was reached, and the worst-case scenario is unlikely for Potash Corp. and Mosaic.

Uralkali sets the tone
Potash exporters have little ability to negotiate a higher price when the market leader decides to sacrifice price for the sake of volume. That's why Uralkali's contracts could be seen as a near-term floor for prices. Earlier in January, Uralkali agreed to sell potash to China at $305 per ton. Recently, the company has negotiated new contact terms with Indian customers at $322 per ton. The difference in price between Chinese and Indian contracts reflects the additional freight costs of shipping the product to India instead of an improvement on the overall price front.

Not surprisingly, members of Canpotex, which consists of Potash Corp., Mosaic, and Agrium (NYSE: AGU  ) , have signed an agreement with Indian customers at the exact same price, $322 per ton. The price of their contract highlights the fact that potash pricing is overly dependent on Uralkali's moves, and Canpotex members could do little to improve the situation on the price front.

The only thing that a potash producer can do to lift prices is to cut output. However, this is the move that Uralkali is waiting for. The company clearly wants to gain market share by flooding the market with cheap production. Certainly, neither Potash Corp., Mosaic, or Agrium want to help their competitor in reaching its goals.

First quarter results could be weaker due to late spring
Agrium has already warned that the late spring season this year was expected to result in first quarter earnings per share just above breakeven. The company stated that its wholesale segment was affected the most, while the impact on the retail segment was limited.

This is a warning sign for Potash Corp. and Mosaic shareholders too, as these companies' business is fertilizer wholesale. Potash Corp. and Mosaic earnings have already been under pressure due to weaker sales volumes as buyers waited for signals that the price floor was reached.

Recent contracts could signal the bottom of potash prices, so the buyer activity will likely increase in the second quarter of this year. It seems that investors should focus on long-term prospects rather than on first quarter results, which should be weak. The second quarter will paint a picture of real potash demand, as buyers who delayed their purchases due to price uncertainty and late spring will return to the market.

Bottom line
The outlook is still clouded for potash producers. Uralkali's moves disrupted the marketplace. Prices will need significant time to recover, as there is little chance that Uralkali will change its mind and cut its production in the near term.

It's worth noticing that potash exporters are comfortably profitable at current price levels. In addition, they pay healthy dividends, with Potash Corp. and Agrium yielding 4.06% and 3.18% respectively. In my view, we've seen the worst on the fertilizer price front, but the way up will be bumpy.

Boost your 2014 returns with The Motley Fool's top stock
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.


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

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.

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: 2906818, ~/Articles/ArticleHandler.aspx, 11/26/2014 6:22:32 PM

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...


Advertisement