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The recent figures by Potash Corporation of Saskatchewan (POT) may have come as a surprise to analysts but we have been saying it all along that we expect demand to rebound in 2013, particularly once contracts with India and China are settled. The fundamentals for the industry remain strong. We have a bullish rating on POT for long-term investors.

Bill Doyle, the CEO of Potash Corporation of Saskatchewan, forecasted global potash shipments to rebound in 2013 to 57 - 58 million tons, against analysts' expectations of 56 million tons. Doyle made the comments at the Morgan Stanley Global Chemicals Conference in Boston on 15th November.

Potash shipments for 2012 are expected to be around 50 to 52 million tons. The latest figures represent a YoY increase of 13 percent. "We see that as a big improvement over this year and we think 2014 is also going to be a strong volume year," Doyle said.

According to Bloomberg, China accounts for about 20 percent of all global shipments, valued at approximately $19.4 billion. India is the second biggest consumer of potash in the world after China. After their last contracts expired, both countries are yet to settle new contracts with Canpotex, the offshore marketing arm of Mosaic (MOS), Potash Corp and Agrium (AGU), the North American potash producers.

Large domestic supplies of potash have kept China away from North American potash, whereas, a weak rupee and reduction in subsidies by the Indian government have made the nutrient too expensive for Indian farmers.

Doyle expects China to settle new contracts by the end of 2012, whereas, contracts with India are expected to be signed by 2Q 2013.

North American potash inventories increased 187,000 tons to end up at 2.77 million tons, a 7 percent sequential increase from September. Inventory levels remain 53 percent above 2011 levels and 44 percent above the five years' average. Sluggish international demand and seasonal decline in U.S. shipments is keeping inventory levels high.

Shipments for October on the other hand were down 18 percent sequentially and 15 percent YoY due to weak exports. Weak exports were driven by the absence of Chinese and Indian contracts shipments. Moreover, global distributors also stepped out of the market to avoid inventory price risk as distributors await contract settlements with key Asian markets.

Though recent times have been challenging for the potash industry, we still expect demand to rebound in 2013 as both China and India settle new contracts. However, we expect prices to be slightly lower.

POT is likely to come under pressure in the near term due to the negative sentiment surrounding the potash market, but long-term fundamentals remain strong. Our stance on POT remains the same - we have an overweight rating on it. We believe sales are just delayed and not destroyed and fertilizer demand will be strong in 2013. POT is well positioned to benefit from a rebound in potash demand.

POT is the world's largest publicly traded potash producer. Its potash reserves amount to over 100 years of production. The company controls the majority of the world's excess capacity and has always followed a price leadership strategy, whereby it has matched production to sales. Potash Corporation is also the world's third-largest phosphate and nitrogen producer. Current phosphate reserves should last more than 50 years. POT accounted for half of the company's shipments in 2011.

Financials:

Potash is trading at a forward P/E of 11. It has a dividend yield of 2.2 percent compared to Mosaic's dividend yield of 2 percent. Both POT and MOS are down YTD, POT by 14 percent and MOS by 6.6 percent. The earnings growth rate for MOS is 8 percent compared to 2.6 percent for POT.

Comp Sheet

Potash Corp.

The Mosaic Company

Intrepid Potash (IPI)

Forward P/E (1 year)

11.1

N/A

14.2

PEG ratio (5 year expected)

5

N/A

1.81

EV/EBITDA (TTM)

9.3

6

7.3

Dividend yield

2.20%

2.00%

N/A

Long-term earnings growth rate

2.6

8.00%

27.20%

Share price Performance (YTD)

-14.00%

-6.60%

-15.00%

Source: Yahoo Finance

Source: Potash: 2013 The Year Of Demand Recovery