More good news is on the way for investors in potash companies such as PotashCorp (POT), Mosaic (MOS -0.64%) and Intrepid Potash (IPI -0.26%). China recently signed an import deal with the Russian potash company Uralkali, agreeing to buy 700,000 tons of potash at $305 per ton. A few days later, China agreed to buy another 700,000 tons from Canpotex, the North American potash cartel formed by PotashCorp, Mosaic, and Agrium (NYSE: AGU), for an undisclosed price generally assumed to be at or around the same $305 per ton.
Both deals come on the heels of news over the holidays a month ago, when the Russian ambassador to Belarus announced that Uralkali was ready to reunite with its Belarusian counterpart, Belaruskali, to restore the mighty Belarusian Potash Company, or BPC, the Eastern Hemisphere's version of Canpotex, which controlled about 40% of the global market until last summer, when the two companies fell out. Between Canpotex and BPC, the two "marketing partnerships" control about 70% of global potash sales, and they're able to use that dominance to keep potash prices higher than they might otherwise be.
So, what's the big deal?
With the price of potash at upwards of $400 per ton just a few months ago, why is $305 such a big deal now? Well, when BPC fell apart, major buyers began delaying purchases on the assumption that prices would fall -- and fall they did. Mosaic, for instance, saw 22% lower potash volumes in its most recent quarter, compared with last year, and PotashCorp, while it managed to sell higher volumes, was forced to do so at lower prices that more than offset the increase.
But China is the biggest global buyer, and the price it pays for potash tends to set a floor under the global market. Now that it's finally coming off the sidelines, other major buyers such as India and the United States will probably stop waiting for a better price and start buying again as well.
Time to pile back in?
While I definitely think fertilizer companies will be a good bet over the next several decades, if your time horizon is shorter, this news is welcome but not necessarily a sign to pile back into these stocks.
In its recently ended fourth quarter, PotashCorp, for example, managed an average $282 per ton for its potash sales, lower than the supposed bottom the Chinese purchases will mark. Even after revising its full-year earnings estimates lower last quarter, the company barely managed to fall in at the bottom of the range, reporting $2.04 per share for the year, indicating how bad the quarter ended up. While prices may improve, management still noted that the lasting effects of the past few months will likely make 2014 a difficult year, estimating earnings of $1.40 to $1.80 for the year ahead, below analyst estimates of $2.00.
It's a similar story with Agrium, which recently updated its estimates for the fourth quarter, expecting earnings to be at the bottom of the range of $0.80 to $1.25 per share that it previously issued. The company cited a few issues, among them lower potash volumes. Potash sales are a relatively small part of the company's revenues, compared with PotashCorp, indicating how bad the problem is.
On top of it all, while signs seem to indicate that BPC will rise again, it isn't yet certain. As my colleague Mark Holder points out, putting your faith in the business politics between Russia and former Soviet states doesn't necessarily make a solid investment plan.