Just when leading potash producers, PotashCorp (NYSE:POT), Mosaic (NYSE:MOS), and Agrium (NYSE:AGU), were hoping for the dust to settle down on the shaken up industry and their stocks were beginning to recover after a rough 2013, the latest news from India could dash all hopes of a recovery.
Reuters reported yesterday that India's fertilizer ministry may slash its potash subsidies by a whopping 20% for the fiscal year beginning April. If that happens, India's potash imports could drop substantially, which will be terrible news for the three companies that were betting heavily on the Indian market to see their sales recover this year. And that could mean another bad year for potash stocks.
Why is this news so important?
India imports 100% of its potash requirement, with the U.S. marketing group Canpotex -- which has PotashCorp, Mosaic, and Agrium as members -- counting as one of its key suppliers. Now picture this: India made up a third of Canpotex's total sales in 2009. That went down to just 5% by 2012, thanks to the nation's lopsided fertilizer policies and dwindling potash demand. Canpotex's revenue has been under pressure ever since.
Government subsidies given to farmers play a crucial role in determining the demand for fertilizers in India. Unfortunately for Canpotex members, the nation has increasingly favored urea -- a nitrogen compound it is largely self-sufficient in. As a result, India imported just about 4 million tonnes of potash last year, compared to nearly 6.4 million tonnes two years ago.
PotashCorp has always emphasized how harmful low potash application can be for soil nutrition and crop yields. PotashCorp believes that pressure from agronomists and scientists should encourage the Indian government to reverse its anti-potash policies. But India doesn't want to dwell over the nitty-gritty of agriculture when its fiscal deficit is swelling. The government slashed potash subsidies last year, and looks like it's at it again. And any further cut makes the nutrient costlier for farmers and could hurt demand.
According to Reuters, the subsidy cut proposal could get cleared within a week. That's worrisome, because India's existing contract with Canpotex expires in March, and if a new one doesn't make way soon, it could spell trouble for member companies. Things anyway haven't been too good with the potash industry since last year's breakup of the other major marketing group between Russia's Uralkali and Belaruskali. As uncertainty increased, demand as well as prices for potash plunged.
With no signs of a settlement yet, Canpotex members were largely pinning hopes on improved demand from the Indian market. PotashCorp projected 20% to 35% jump in India's potash imports for 2014 during its last earnings call. Likewise, Mosaic recently fueled the market's hopes when it projected India to import an additional one million tonnes of potash this year.
PotashCorp and Mosaic together contribute nearly 90% to Canpotex's potash requirement. In fact, Mosaic's share in Canpotex climbed to 42.5% just this January, so this news from India is ill-timed for the company. As the smallest member in the group, Agrium should be least affected by changes in India's potash consumption pattern.
What's next for potash stocks?
The problem could be manifold. Even if India imports as much potash this year as it did in 2013, lower prices will still mean lower revenue for potash companies. Canpotex can't afford to demand higher prices when Uralkali is keen on increasing production to capture a larger market.
There's also a possibility that India turns into a spot market to take advantage of price movements instead of booking prices through contracts. If that happens, PotashCorp and peers will lose the advantage of having at least a portion of their revenue locked in advance. In other words, potash companies are largely at the mercy of India, and news from the nation isn't looking good right now. Keep an eye on any development on this front, because that could determine where the potash stocks are headed from here.