Potash Corp. (POT +3.9%) and other fertilizer makers rally as FT reports the two largest shareholders in Uralkali have endorsed the logic of restarting a partnership with the Belarus potash export cartel, opening the door to a deal that would end the potash war that has roiled the industry.
No formal negotiations have occurred between the two companies about restarting their partnership, but the subject is said to have been mentioned informally.
Potash is one of Russia’s important export products, Newedge's Robbert van Batenburg notes: “The erstwhile cartel between Russia and Belarus supplied 43% of total global potash demand... Non-Russian potash supplier[s] may benefit from a potential trade sanctions that could impact Russian potash exports.”
Higher natural gas prices will have an outsized negative impact on Agrium (AGU) and Methanex (MEOH), CIBC says, explaining that the rising prices will squeeze margins for plants that do not have long-term gas contracts.
Every $1/MMBtu increase in gas prices negatively impacts methanol margins by $38/metric ton, the firm says, adding that ~15% of AGU's and 22% of MEOH's gross profit could be hit by higher gas prices over the long term.
Mosaic (MOS) and Potash (POT) are less impacted, according to CIBC.
The market seems to view DuPont (DD +1.3%) as a stodgy chemical company, but it is one of the world's biggest sellers of seeds, pesticides, fertilizers and other crop protection products; a Barron's profile says shares could climb 20% as investors start to give DuPont credit for those businesses.
DuPont delivered better than expected Q4 earnings last week, helped by fast-growing sales in its agriculture division; the unit contributed ~40% of 2013 operating profit and is DD's fastest-growing business, with sales that could rise at a double-digit rate during the next few years.
Compared with companies focused on agriculture chemical products, DD has been trading at a discount, at 14.2x estimated 2014 earnings; investors pay 19x-20x estimated earnings for Monsanto (MON) and Potash (POT).
"Although 2014 potash sales guidance was disappointing ... the recent upward swing in global spot potash prices, the fact that Chinese buyers have concluded H1 delivery contracts, and that the global potash market is expected to report reasonable growth this year (+3.7%) suggest that the market is stabilizing and that as buyers adjust to the new market reality, demand should accelerate," says TD analyst Greg Barnes, upgrading Potash (POT +0.5%) to Buy with $37 price target.
Though lagged, demand does respond to price, he says, and encouraging signs thus far this year suggests demand will accelerate and a price floor has been found. His team sees Potash's 2014 potash sales coming in at the upper end of 8.2-8.6 million ton guidance.
Despite a potash market that remains in flux in the near term, Morningstar's Jeffrey Stafford still thinks Potash Corp's (POT -0.4%) volume is set to expand significantly over the long run as potash demand in emerging markets grows and the company fills newly installed brownfield capacity.
The firm forecasts long-term sales volume of more than 14M metric tons/year vs. its revised 2014 forecast of ~8.4M.
Potash prices could skyrocket if demand accelerates in China and India and supply is constrained, but the firm maintains a high uncertainty rating for POT with its wide potential sales range and high operating leverage. (Q4 earnings)
Potash (POT) -4.3% premarket after posting a 45% drop in Q4 earnings and issuing weaker than expected earnings guidance for 2014 on expectations for continued pricing pressure.
Gross margins fell as lower prices for all three fertilizer nutrients - potash, nitrogen and phosphate - outweighed improved costs and higher sales volumes.
In its downside guidance, POT sees Q1 EPS of $0.30-$0.35 vs. $0.46 analyst consensus, and sees FY 2014 EPS of $1.40-$1.80 vs. $2.01 consensus.
Q4 potash sales volumes rose 13%, largely fueled by North American activity, but average potash prices fell to $282/metric ton in the quarter from $387 a year earlier; while POT near-term pressure on potash prices appears to have subsided, "its impact is expected to suppress our offshore realizations through the early part of 2014."
Potash Corp. (POT +0.9%) is upgraded to Outperform from Market Perform with a $37 price target from $30 at Raymond James, which thinks dark clouds over potash are beginning to lift and sees the recent pullback is a long-term opportunity.
Uralkali and Canpotex agreements with China are seen as a "new global floor price," and recent events suggest Uralkali and Belaruskali may be interested in repairing their relationship, the firm says.
In suggesting investors shouldn't mistake a potash price floor for a long-term recovery, Goldman’s Adam Samuelson raises his price target for Potash (POT -1.2%) while downgrading peer Mosaic (MOS -1.3%) to Sell and maintaining a Sell rating for Intrepid Potash (IPI -1.2%).
The firm keeps POT at Neutral thanks to greater valuation support at POT given its 4.1% dividend yield, which it sees as sustainable given its pricing/cash flow forecasts; a more favorable cost outlook following recent headcount reductions, which should help the company improve utilization at lower-cost facilities; and earnings ballast from a less negative near-term outlook.
The firm's new $32 price target for POT, up from $24, still implies 5% downside, and its core industry view is that both companies will be significantly impacted.
Uralkali (URALL) yesterday reached a potash sales deal with China for $305/metric ton, indicating a possible end to the uncertainty in the potash market after prices fell more than 25% from $400/ton last summer when the Russian producer left a trading partnership with Belarus and broke an informal global pricing cartel.
While J.P. Morgan seems to see a return to price rationality, others aren't so sure; Morgan Stanley is looking ahead to H2, when demand is weak and there's incentive to price undercut again, while Cowen thinks the new contract is likely to keep pricing down for some time to come and, combined with Agrium's (AGU -0.1%) downward guidance, may weigh on fertilizer shares.
Wunderlich notes Intrepid Potash (IPI -0.6%) sells granulated potash, which is priced at a 10%-15% premium to standard; at $335/ton potash, the firm figures IPI could see a ~$165M swing in free cash flow in 2014 from a negative $115M last year to a positive $50M-$55M in 2014.
The Obama administration is considering measures to toughen rules on fertilizer plants, farmers and oil drillers using or storing explosive chemicals such as those tied to a fatal blast in rural Texas last year, Bloomberg reports.
Among policies being considered: lowering the threshold at which the government would be notified that ammonium nitrate is being used or stored; requiring farmers and oil drillers to report on explosive chemicals they possess; and adding chemicals to the hazardous substances lists.