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Recent farm sector strength has pushed potash sales higher even though there has been a slide in the price of potash. And despite the increasing revenue stream, many fertilizer and potash company stocks have reached 52-week lows.
Stagnant potash prices, an uncertain economic picture, and increasing costs have created divergent fortunes for potash producers in recent weeks, with rising sales numbers contrasting with near multi-year lows for stock values.
A number of firms have been able to make strong sales gains on the back of recent strong international farming fundamentals and reduced supply after majors Mosaic (NYSE:MOS) and PotashCorp (TSX:POT,NYSE:POT) cut output at the beginning of the year.
“From the beginning of the second quarter there has been a re-awakening of demand in the fertiliser market,” Israel Chemicals (ICL), the world’s sixth-largest producer of potash, said this week.
ICL is one of the stronger performers, and recently announced larger-than-expected Q1 profits of US$288.9 million – above its previous forecast of US$267.2 million – thanks to sales in Brazil’s recovering soybean markets and a renewed Chinese supply contract signed at the end of March.
“Given this contract and decreased inventories in the global supply channels, coupled with strong farming fundamentals, this should result in improved demand in the second quarter,” Citi analyst Andrew Benson told Reuters this week.
Strong farm fundamentals, due in particular to the replanting of struggling Brazilian soybean crops and significant sowing in the US and Canada, have driven overall potash sales higher in the second quarter. After reducing potash inventories, companies have been able to boost profits by lowering production and storage costs while benefiting from strong fertilizer applications.
While a fallback in robust US sales has the potential to put downward pressure on potash contract and spot prices, the Indian “wild card” could still provide price support moving deeper into the summer months.
“We expect that India will come back to the table given that it understands the game of roulette it is playing in reducing potash consumption two years in a row,” global investment bank Macquarie said last week.
“If India negotiates larger than expected volumes, potash prices will likely rise.”
Spot potash prices (FOB Vancouver) have edged down in past months from US$495 per tonne in March to US$480 in April, Scotiabank’s Global Economic Research department reported earlier this month.
Prices in more defined market conditions have also held steady, with Uralkali (LSE:URKA), Russia’s largest potash producer, announcing that it will leave its price ceiling for domestic agricultural producers unchanged at about $160 per tonne (4,760 roubles) in the second half of the year.
Uralkiali’s domestic prices are set by a federal regulator that guarantees domestic price rises in line with the industrial inflation index.
Falling share values
Despite a relative resurgence in potash and fertilizer sales in the past quarter, numerous stocks continue to trade at bottom yearly or multi-year levels. Sticky price levels and a slightly grim outlook after a strong rebound in fertilizer sales for spring planting are primarily responsible for depressed share values.
Intrepid Potash (NYSE:IPI), the largest producer of potash muriate in the US, hit a 52-week trading low this week as it struggled against stagnant potash prices and slowly rising operating costs.
Elemental Minerals (TSX:ELM,ASX:ELM) has also been impacted by stagnant prices and concerns over the timing of its entry into the marketplace, keeping its stock price near its 52-week trading low as well.
Potash giants PotashCorp, K+S (FWB:SDF1), and Agrium (TSX:AGU,NYSE:AGU) have also been subject to what is seen as a possible fertilizer sector slump. The shares’ poor performance has reflected greater uncertainties within the market, such as concerns about the Chinese economy, weak US jobs data, and Eurozone health.
But Canada’s National Bank contends that “the secular uptrend for the ag sector remains intact. However, we do appear to be in relatively neutral territory today, ie near the midpoint of the current grain price cycle.” As a result, many continue to hold a tentative position on the sector as a whole for the near term.
Junior mining news
Mesa Exploration (TSXV:MSA) announced last week that it gained support from a Utah Congressional delegation for the 100 percent owned Bounty potash project in Western Utah. US Senators Orrin Hatch and Mike Lee, as well as US Congressman Rob Bishop, have expressed support for the development of the project to the Bureau of Land Management. In response to receiving this support, Mesa President and CEO Foster Wilson said that “[i]t is encouraging to receive such strong political support at the federal level,” and commented that “Mesa looks forward to developing the Bounty Potash Project in such an industry-friendly environment.”
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company or resource mentioned in this article.