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Price Floor Seems to Be Set for Potash Exporters

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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.

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Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

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9/2/2015 10:49 AM
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