At the end of December, my 2010 outlook for potash fertilizer was not particularly bright. I said I was avoiding the group -- meaning PotashCorp (NYSE:POT), Mosaic (NYSE:MOS), and Agrium (NYSE:AGU) -- at prevailing prices.
Mosaic made some bullish comments on the potash market on its conference call three weeks ago, including a pretty convincing argument that the Chinese contract price doesn't matter all that much. Consider that China keeps ramping up internal capacity, while Brazil has only one producer -- Vale (NYSE:VALE) -- and imports 91% of its potash. That extreme reliance on foreign fertilizer will drop when Vale begins production at the mine it bought from Rio Tinto (NYSE:RTP) last year. For the next few years, though, Brazil (along with India) ought to drive the potash market, rather than China.
Following that call, I got to thinking that perhaps I'd been too harsh on the sector. Then PotashCorp reported, and alas, the company didn't offer much to get excited about. Although fourth-quarter earnings beat estimates by $0.02 a share, 2010 guidance was way off at only $4-$5 a share. That's pretty meager for a stock trading at more than $100.
The near-term threat to potash purveyors -- that demand won't rebound as strongly as PotashCorp's 50 million-metric-ton forecast implies -- is clear enough. The long-term picture is more important, and also more interesting. Demand will return, without question. On the supply side, though, I'm not so sure that the currently entrenched oligopoly will be able to stem the tide. Vale's production is modest, but the firm is talking about going to 12 million tons per year. BHP Billiton (NYSE:BHP), meanwhile, has not only advanced its massive Jansen project, but just announced the takeover of Athabasca Potash and its neighboring Burr project.
In 2007 and 2008, the world's biggest miners saw how lucrative the potash market can get, and it seems they are prepared to spend the big bucks to get in on the action. It will take time for them to alter the current landscape, but the barriers to entry are not insurmountable. While I expect firms like PotashCorp to continue to fare well, I'm not sure investors have factored in the long-term effect on profit margins that new entrants will usher in.
