Potash Prices Have a Floor But There Is Limited Upside Potential

With potash prices finding a floor a great deal of uncertainty has ended for producers. However, there is limited upside potential for potash prices.

Apr 23, 2014 at 2:02PM

The breakup of the Belarusian Potash Company (BPC) last year led to a huge drop in potash prices. Amid concerns that potash prices could drop below $300 per ton, shares of North American potash producers Potash Corp. (NYSE:POT), Mosaic Co. (NYSE:MOS), and Agrium (NYSE:AGU) fell sharply last year. However, shares of all three companies have been recovering lately as potash prices seem to have found a floor. But, potash prices have limited upside potential as subsidy cuts in India, a key market, will keep demand in check.

Potash prices have a floor
The biggest concern for the potash market after the breakup of BPC was that prices would drop significantly. While prices did drop sharply, they never went below $300 per ton.

Russia's Uralkali, one of the partners in the BPC, agreed to sell 700,000 metric tons of potash to Chinese customers at $305 per ton earlier this year. It may be recalled that it was Uralkali that had decided to walk out from the BPC last year as it wanted to shift its strategy from price to volume. The fact that Uralkali agreed to a price above $300 ended a great deal of uncertainty over prices.

In fact, shortly after Uralkali signed a deal, Canpotex, which includes Potash, Agrium, and Mosaic, signed a deal to supply China's Sinofert Holdings with 700,000 metric tons during the first half of 2014. The North American cartel did not reveal the deal value; however, it noted that the deal was priced at current and competitive market levels.

Uralkali's and Canpotex's deals with Chinese customers created a floor for potash prices earlier this year. Not surprisingly, shares of North American potash producers reacted positively to this. Year to date, shares of Potash are up more than 8%, shares of Agrium are up more than 3%, and shares of Mosaic are up more than 4%. The S&P 500 has gained more than 2% in the same period.

Floor strengthened
The floor for potash prices was further strengthened after deals with India earlier this month. Uralkali reached an agreement with India to sell 800,000 tons of potash at $322 per ton. A few days later Canpotex agreed to an annual contract with India to supply around one million tons of potash at a price of $322 per ton.

Now that potash prices seem to have found a floor, there is far more certainty for potash producers. Also, as I noted in an article last month, there is a possibility for the BPC venture to be formed again. All these are positive developments for the potash market and make North American potash producers worth a look, especially Potash and Agrium as they also offer attractive dividend yields. Potash currently has a dividend yield of 3.94% and Agrium has a dividend yield of 3.17%. Mosaic has a dividend yield of 2.04%.

However, the outlook for potash producers is not entirely bullish, as there is limited upside potential for potash prices.

Subsidy cuts in India
India relies on imports for meeting its potash demand; however, local prices have been rising due to subsidy cuts and a weaker currency in the last two years. As a result, Indian potash demand has weakened. There were expectations that lower prices will boost demand from the country, which in turn was expected to boost prices, going forward.

However, that is not likely to be the case now as India has cut potash subsidies by almost a fifth to $160 per ton for the current fiscal year, which began in April. As a result, retail potash prices in India will remain high and any benefit from lower global prices will not be passed to customers. This means that at best Indian demand will remain steady. For potash producers that were banking on a rebound in Indian demand to boost prices, this is bad news.

You don't want to miss this
The Economist compares this disruptive invention to the steam engine and the printing press. Business Insider says it's "the next trillion dollar industry." And everyone from BMW, to Nike, to the U.S. Air Force is already using it every day. Watch The Motley Fool's shocking video presentation today to discover the garage gadget that's putting an end to the Made In China era... and learn the investing strategy we've used to double our money on these 3 stocks. Click here to watch now!

 

Varun Chandan Arora 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers