Down But Not Out: Long Term Fundamentals For The Fertilizer Industry Remain Strong

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Includes: MOS, POT
by: Bidness Etc

The second half of 2012 has been challenging for fertilizer companies as China and India, the two biggest consumers of Potash, did not sign any new contracts for the purchase of fertilizers in the latter half of 2012. Moreover, fertilizer demand is expected to be low at the start of the next year as well, as it is being predicted that both China and India would purchase lower volumes in 2013 as compared to the preceding years.

As we mentioned in our previous articles, China has ample supply of potash from domestic producers, while a weak Indian rupee and reductions in subsidies have made potash more expensive for Indian farmers.

Uralkali (OTC:URALL), the world's largest producer in terms of output and second largest in terms of capacity, announced to cut its potash output by half to counter the excess global supply and prolonged fall in demand. The company will cut its potash output to 2 million tons during the December 2012 to March 2013 period.

"Starting from December and during the first quarter we will work with 50 percent of capacity, because demand will be rather weak," CEO Vladislav Baumgertner told Reuters. "We also expect that this will help decrease stocks."

"Stocks will be consumed by the market during the first quarter, and producers will be able to sign contracts with China in March," Baumgertner further said.

"Stocks in India are not too high and stay on usual levels - of about 1 million tonnes. The Indian contract can be signed already in December," he added.

The company believes that next year, the global potash demand will increase by 11 percent to end up at 54 million, from 48-49 million tons in 2012.

Potash Corporation of Saskatchewan (NYSE:POT), on the other hand, announced last month that it would close down two of its mines for eight weeks each.

Operations for the Allan mine will be closed from December 16, 2012 to February 9, 2013 (8 weeks). The New Brunswick mine will be closed from December 30, 2012 to February 23, 2013 (8 weeks).

The company said in its press release that it was an inventory related shutdown "consistent with PotashCorp's practice of matching supply with market demand."

"Not having a contract with India and China is the primary cause of this," said PotashCorp spokesperson Bill Johnson. "And as a result of that, I think some of our other international customers are also deferring their purchasing to get a bit more clarity on where the market is going."

Although demand is weak in the Indian and Chinese markets, the North American market remains strong. Moreover, demand in Brazil, which imports 90 percent of its entire potash requirement, is expected to rise again.

Though recent times have been tough 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 than before.

Both POT and The Mosaic Company (NYSE:MOS) are likely to come under pressure in the near term due to the negative sentiment regarding the potash market, but long term fundamentals remain strong. Our stance on POT and MOS remains the same; we have an overweight rating on both. We believe sales are just delayed not destroyed. We believe fertilizer demand will be robust in 2013, and both these companies are well-positioned to benefit from a rebound in potash demand.

We believe the fundamental outlook for agriculture remains positive. As we mentioned in our previous articles, high grain prices and elevated farmer income will increase the application of fertilizers, as farmers look to capitalize on strong crop economics through enhanced yields.

POT is trading at a forward P/E of 11.6x and it has a dividend yield of 2.2 percent compared to 1.9 percent for MOS. While POT is down 11 percent YTD, MOS gained 1 percent in value.

Comp Sheet:

Potash Corp.

The Mosaic Company

Forward P/E (1 year)

11.6

N/A

PEG ratio (5 year expected)

5

N/A

EV/EBITDA (TTM)

9.7

6.6

Dividend yield

2.20%

1.90%

Long-term earnings growth rate

2.63%

8.00%

Share price Performance (YTD)

-11.00%

1.00%

Click to enlarge

Source: Yahoo Finance

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Basic Material Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.