Mosaic Guidance Confirms That Potash Industry Fundamentals Remain Challenged

Sep.26.13 | About: The Mosaic (MOS)

Mosaic Co (NYSE:MOS), North America's second-largest fertilizer producer, reduced its quarterly forecast for its potash and phosphate businesses in its recently released guidance update. The negative guidance is reflective of both the delays by global fertilizer buyers due to the Belaruskali-Uralkali disputes and slow buying in North America given a later than usual harvest this year.

There is a widespread mixture of deflationary price expectations and acute buyer uncertainty across China, India, and Southeast Asia leading to a substantial slowdown in shipments. August data released by leading fertilizer companies showed a Y/Y drop of 7% in North American domestic potash sales, 16% in North American potash exports, and 15% in U.S. DAP/MAP disappearance.

MOS decreased its 3Q13 potash volume guidance to 1.45-1.65 million tons (from the previous forecast of 1.8-2.1 million tons). For phosphates, the company now expects 3Q shipments to be in the range of 2.6-2.8 million tons (from the previous forecast of 2.9-3.3 million tons) at an average realized DAP price of $430-$440 per ton (from $430-$465 per ton).

The reduced guidance is a direct consequence of some of the important regions stopping purchases because of an absence of pricing visibility. The company also reduced its pricing guidance and 3Q13 realized prices are now expected to be in the range of $330-$340 per ton. As prices continue to fall, volumes should improve modestly in 4Q13 and into next year, but it's unlikely that volumes would improve enough to counterpoise the magnitude of the price decline. Moreover, the degree of the Y/Y volume improvement in next year will mostly be dependent on growth in China and India, which will depend on how sharply prices fall in the coming months.

While speculation on the prospects of some degree of reconciliation between Belaruskali and Uralkali (OTC:URALL) have led to some share price volatility, particularly for the potash-exposed stocks, the MOS guidance cut offers a reminder that pricing and demand indicators for potash and phosphate remain challenged, offering a near-term headwind to all the nutrient stocks.

Conclusion

Given ongoing uncertainty regarding the potash industry structure, pricing, and risks associated with lower commodity grain prices in 2014, we remain cautious on the fertilizer / potash stocks and prefer to remain on the sidelines until there is further clarity. It must also be stressed here that even if there is some degree of reconciliation between Uralkali and Belaruskali, it is highly unlikely to substantially reverse negative industry trends, particularly pricing. Furthermore, depending on the price declines, pricing discipline will become even more fragile especially in higher growth areas such as Southeast Asia and South America. As of now the potash industry fundamentals remain challenged.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.