4 Big Reasons the Potash Market Could Soon Turn the Corner

Uralkali’s latest words, and actions, could signal the end of woes for PotashCorp, Agrium, and Mosaic.

| More on:
The Motley Fool

“Uralkali’s Board of Directors decided to change the Company’s market posture and move from a rigid ‘price-over-volume’ strategy to a more flexible approach whereby the Company continues to focus on shareholder value maximization, prioritizing volumes or prices depending on the market situation,” said Russia’s Uralkali, the world’s largest potash producer by output, during its last earnings release.

Every investor in PotashCorp (TSX:POT, NYSE:POT), Agrium (TSX:AGU, NYSE:AGU), and Mosaic (NYSE: MOS) should read the lines carefully, because the key to where the potash market, and these companies, is headed could be hidden within.

The story so far
Uralkali’s decision to break away from its cartel with Belaruskali last year sent potash stocks plummeting as a cloud of uncertainty shrouded the market. The two companies, together with Canpotex — the marketing group comprising of PotashCorp, Mosaic, and Agrium — largely controlled the supply, and hence prices, of potash nutrient until Uralkali decided to go its own way and pursue a volume-over-price strategy. Soon after, potash prices crashed, and so did investors’ hopes.

But recent industry developments could indicate that the worst may be over for potash companies.

A major breakthrough
After announcing its break up with the BPC mid-last year, Uralkali predicted global potash prices would slip 25% to $300 within months. Last week, Uralkali contracted to supply 700,000 tonnes of potash to China for $305 per metric tonne through June 2014. The deal is significant for one big reason – it could indicate the bottoming of potash prices, because Uralkali had also mentioned  earlier that “a potash-price decline below $300 a ton is not likely.”

But you may wonder why potash prices can’t fall further if Uralkali continues to dump greater amounts of potash into the market even as demand remains soft. The answer could lie in Uralkali’s words stated above. While the company insisted on boosting production volumes earlier, it seems to have flexed its stance now. At least that’s what these words suggest: “the Company continues to focus on shareholder value maximization, prioritizing volumes or prices depending on the market situation.

Is this the bottoming?
So Uralkali has kept its options open: whether to sell more at lower prices, or restrict supply and command higher prices from customers. With major consumer, China willing to pay $305 per tonne of potash, it’s unlikely that Uralkali will now do anything that could push prices below the $300 mark. In other words, potash nutrient may have found a floor price.

In fact, right after Uralkali’s contract, Canpotex also received an order from China for supply of 700,000 tonnes through the first half of this year, confirming a bounce back in the global demand for the nutrient.

More to come
I won’t be surprised if India, another major potash importer, follows suit with a contract. India usually waits for China to sign contracts before signing its own.  More notably, according to one of the leading potash companies, India Potash, the nation usually pays $15 to $20 more per tonne of potash than China.  So despite the nation’s existing contract with Canpotex lasting through March this year, the low prices could encourage it to renew the contract, which bodes well for Canpotex members.

Positive signs
Aside from the probable potash floor price, there are other factors that suggest that the potash market could already be on its way to recovery. According to the latest market data released by PotashCorp, North American producers’ December potash inventory fell 27,000 tonnes sequentially, and is also lower year over year. At the same time, industry production in the month of December declined 17% sequentially. Meanwhile, potash exports from North American producers in December were up a substantial 27% and 17%, sequentially and year over year, respectively.

These factors clearly indicate a tightening demand-supply situation, which bodes well for PotashCorp, Agrium, and Mosaic.  In fact, by suspending operations at some of its mines to reduce production, PotashCorp is playing a key role in balancing demand and supply in the industry, and should continue to do so.

The Foolish bottom line
The recent developments in the potash market look positive, and investors can remain hopeful that the downturn may not last long. Investors will get an even better idea about where the market is headed when PotashCorp reports its fourth quarter and full-year numbers this Thursday. Make sure you do not miss the big event, since it should give you valuable insight into the future of the potash companies, and their stocks.



This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Neha Chamaria does not own shares in any of the companies mentioned at this time.  The Motley Fool Canada recommends Agrium.  The Motley Fool owns shares of PotashCorp.

More on Investing

Dividend Stocks

Enbridge Stock: This Dividend Aristocrat Looks Like a Steal in 2023

Here are some key factors that make ENB a great Canadian dividend stock to buy on the dip in 2023.

Read more »

Stocks for Beginners

Invest in These Stocks to Make the Most of Your TFSA

If you are unable to find fundamentally strong stocks for your TFSA in 2023, here are two great stock picks…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

U.S. Debt Ceiling: Is It Safe to Invest Right Now?

The U.S. debt ceiling is in the headlines again. You can play it safe by investing long term in wonderful…

Read more »

Stocks for Beginners

2 TSX Stocks to Smooth Over the Market’s Bumps

Here are two of the safest TSX stocks you can buy in June 2023 without worrying about high stock market…

Read more »

Dice engraved with the words buy and sell
Bank Stocks

1 Bank Stock I’d Buy Today (and 1 I’d Sell)

Bank earnings season is upon us, and I’d look to buy Bank of Nova Scotia (TSX:BNS) while avoiding another top…

Read more »

Credit card, online shopping, retail
Tech Stocks

Should You Buy Lightspeed Stock After Its Q4 Earnings?

Despite its volatility, I expect Lightspeed to outperform in the long run due to its healthy growth prospects and cheaper…

Read more »

oil and natural gas
Energy Stocks

These Canadian Energy Stocks Are Bargain Buys for 2023

Here are two of the best Canadian energy stocks you can buy on the dip in 2023 to hold for…

Read more »

A worker drinks out of a mug in an office.
Bank Stocks

Royal Bank Stock Pays a 4.37% Dividend Yield, But Another Stock Looks Even Better Today

Royal Bank of Canada (TSX:RY) may be the top dog on the TSX, but I prefer another dividend stock for…

Read more »