The potash industry is set to undergo a change in focus, with the emphasis veering away from prices to volumes, according to Liberum Capital.
Responding to the recent US$400 a tonne supply deal Canada's Canpotex, the world's largest potash exporter, inked with Sinofert, the Chinese state fertiliser company, Liberum has downgraded its 2013 earnings per share estimates for potash players K+S and ICL by 17% and 11% respectively.
The price Canpotex got was lower than Liberum was expecting, plus the weaker US dollar will also weigh on the potash producers' profits, but Liberum reckons the bulk of the earnings downgrades will already have been discounted.
"The underperformance of global potash shares in 4Q12 has already incorporated much of this price-related weakness," Liberum said.
"Last year Canpotex signed a 1H [first half] contract with Chinese buyers at the end of March for 0.5kT [500,000 tonnes] (with options for a further 0.2kT). The 1H 2013 is for double the volumes and comes three months early. We believe this is indicative of a stronger potash demand recovery than is currently discounted and expect investor focus to shift towards the main beneficiaries of such a recovery," Liberum postulates.
"Since 2010, potash sales volumes at ICL have fallen c.20% due to weaker demand in India and Europe. We forecast a recovery back to 2010 levels in 2013. We believe India will follow China in signing 2013 contracts in 1Q and although we do not expect Indian volumes to recover back to 2010 levels we expect the difference to be made up by greater demand from China. K+S is capacity constrained at its German mines and so will not be able to partake materially in rising demand," Liberum reckons.
Liberum has upgraded ICL to 'buy' but remains bearish on K+S.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.