2011 came in as a disappointment to potash and phosphate investors, who saw record prices, weak supplies and undervalued producer share prices.
By Leia Toovey- Exclusive to Potash Investing News
After a stellar 2010, 2011 came in as a “disappointing” year in terms of investment results in potash and phosphate stocks. In 2011, grains touched record prices, and supplies touched record lows. With rising grains prices, farmers have incentive to fertilize to maximize yields and profits. Still, given the sector’s fundamentals, the stocks of potash and phosphate producers performed poorly.
After a look around the sector, it is easy to see that as the year comes to a close, most potash and phosphate producers have stock values hovering close to 52-week lows. As of December 21, shares of Potash Corporation of Saskatchewan (NYSE:POT) were trading at $40.14, just above their 52-week low of $38.42, and well off their 52-week high of $63.97. Intrepid Potash (NYSE:IPI) is at $22.64; their 52 week low is $20.75 and their 52 week high $40.22. Agrium (NYSE:AGU) is fairing slightly better, with a share price of $67.59 compared to a 52-week low of $60.15, and a 52-week high of $99.14. Given the banner year potash and phosphate producers have had in terms of production, demand, and pricing, it is surprising that share values have not reflected fundamentals.
Record potash demand
2011 was a year of record demand for both phosphate and potash. For potash, demand rebounded so aggressively, and so suddenly, that both Canpotex and BPC were virtually sold out of potash by the third quarter of 2011. In the second quarter of 2011, Potash Corp. saw production hit an all-time record high of 2.6 million tonnes.
Fertilizer prices increased in 2011
Prices for potash and phosphate also advanced this year. Potash enjoyed an approximate $100 per tonne increase over the course of the year (in March, potash was fetching $409 per tonne recent contracts were settled in the range of $520 to $550 per tonne). Meanwhile, phosphate also witnessed a $100 per tonne price increase.
Poor economic picture impacts potash producer stock prices
This year, strong sector fundamentals were overshadowed by a deteriorating global economic picture. The ongoing debt crisis in Europe took a bite out of all commodities; potash and phosphate were no exception. Adding to the downside potential in the potash and phosphate market, was the disappointing global economic recovery. After a rapid rebound from the recession in 2010, gains in 2011 did not keep up with expectations. As stated by Bill Doyle, CEO of Potash Corporation, producers of potash and phosphate are “not immune to the global macroeconomic picture.” Even as the year comes to an end, after about 6 months of uncertainty, the global economic outlook is still mixed.
There are mixed views on the performance of the fertilizer sector for the future. According to Patricia Mohr, Scotiabank economics VP and commodity markets specialist, “The average spot price of potash should climb to at least $650/t by late 2012 – perhaps higher.” In an interview, Northern Securities analyst Fadi Benjamin said “In the short term, you should expect prices to continue going up.” While Benjamin said spot potash prices reaching $600/t at the Port of Vancouver would “definitely be a stretch”, they could “easily” add a further $50/t to current levels during 2012. Richard Kelertas of Dundee Securities Corp expects flat growth over the coming months. However, if the European debt crisis is resolved, Kelertas predicts that the potash market could see a boost.
The outlook for phosphate is trending negative. In the last month of the year there was a plethora of analyst downgrades to phosphate stocks, all citing weakening phosphate prices. Most recently, JPMorgan (NYSE:JPM) cut its recommendation on shares of Mosaic Co. (NYSE:MOS) to neutral from overweight as phosphate prices are moving lower and may continue to do so following capacity additions in the Middle East.
Securities Disclosure: I, Leia Toovey, hold equity interests in Potash Corporation of Saskatchewan