Why PotashCorp's Stock Plunged in 2013

For investors in PotashCorp (POT), 2013 was a disastrous year, with the stock missing out on the bull market and falling 19%. Although the same factors also led to poor performance from rivals Mosaic (MOS 1.74%) and Agrium (NYSE: AGU), PotashCorp arguably has the toughest road back in demonstrating its ability to weather a huge storm in the fertilizer industry. Let's take a closer look at the company to discover why PotashCorp fell so hard this year and whether it can bounce back in 2014 and beyond.

PotashCorp's Allan mine. Image source: PotashCorp

What sent PotashCorp down?
PotashCorp's losses all largely stem from one industry-shaking event: the breakup of the Belarus Potash Company cartel in late July. Essentially, the potash industry is composed of two major exporting and marketing groups, with PotashCorp, Mosaic, and Agrium all belonging to Canpotex. The two marketing and exporting groups control about 70% of the potash market, helping give them better bargaining power in negotiating prices for supply contracts to agricultural producers. When Uralkali, one of the members of the Belarus cartel, decided to break ties with partner Belaruskali, it undercut the pricing power the groups had, leading many to conclude that potash prices would plunge and take profits for PotashCorp and its peers with it.

PotashCorp Total Return Price data by YCharts

What's important to remember, though, is that even before the Uralkali news, PotashCorp wasn't having a terribly good year. In the week before the Uralkali announcement, PotashCorp had given investors negative guidance for the rest of the year, pointing to weak results not just in potash but in its phosphate and nitrogen fertilizer divisions as well. In particular, PotashCorp said that it would cut back on production at two of its potash mines, trying to reduce inventory levels and do its part to bolster worldwide fertilizer prices.

By contrast, PotashCorp's rivals have taken a variety of different approaches to changing industry conditions. Mosaic decided to double down on phosphate production, buying CF Industries' (CF -0.15%) phosphate business for $1.4 billion and making potash a less important part of its overall business. Agrium, meanwhile, has used its exposure to nitrogen-based fertilizers to give it a more diversified profile in the industry, although rising natural-gas prices could make that strategy less attractive in the long run as well.

Stats on Potash Corp. of Saskatchewan

Source: S&P Capital IQ

Can PotashCorp bounce back from here?
To recover, PotashCorp needs to convince investors that it's a value play. The aftermath of the Uralkali move has shown the fundamental strength of the fertilizer industry generally, as China's sovereign-wealth fund took a 12.5% position in Uralkali in September, reflecting its belief in the intrinsic value of beaten-down potash producers. Yet fundamentally, PotashCorp still looks weak. Earlier this week, PotashCorp said it would lay off more than 1,000 employees by the end of the year, citing the need to cut costs in light of falling fertilizer prices and weak demand.

One big question facing PotashCorp is whether demand will return in the long run. The company has major products that could contribute hugely to making new supplies of potash available. But if prices don't stabilize and turn higher, those huge stores of fertilizer will be a mixed blessing for PotashCorp. Given that Mosaic and Agrium could move back toward potash production if conditions get better and that new entrants are considering the space, it could be a while before the future looks clearer for PotashCorp.

This was a year that PotashCorp would prefer to forget. But as long as demand for greater crop production makes fertilizer products cost-effective, PotashCorp should enjoy a long-term support to its business, making any pullbacks buying opportunities for long-term investors willing to endure what could be long periods of relative weakness.

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