Operating in the agricultural chemicals industry, Potash Corp./Saskatchewan (TSX: POT)(NYSE: POT) produces and markets fertilizers and related industrial and feed products globally. It produces the three primary crop nutrients: potash, nitrogen, and phosphate.
Consider the following three positives concerning Potash Corp. and its markets, as well as two issues that could affect the company’s growth.
Why to buy
1. Company strategy
The company’s fundamental strategy is growth through potash first. The other component of its strategy is stability by way of its diversified nitrogen and phosphate businesses. Its emphasis is on improving its competitive advantages mainly in potash. It emphasizes potash because it’s a high-margin business with few producers and has substantial potential for long-term demand growth.
2. The need for increased crop yields from available farmland
Due to urbanization and population growth there is less farmland available per person. Crop yields are low in a number of growing regions such as China and India. Potash Corp. focuses on the fertilizers and related products needed to help these regions improve their fertilizer usage and potentially increase crop production.
The company has world-class potash operations. It has the ability to add considerable capacity without building an expensive new mine. It has access to five lower-cost production facilities in Saskatchewan and one in New Brunswick.
Furthermore, it has strategic investments in four global potash-focused companies. These provide Potash Corp. with greater exposure to important growing markets. The high costs and long timelines to build new capacity limit new entrants into the industry.
3. Five main worldwide markets and its capacity
The company’s principal markets are China, India, Other Asia, Latin America and North America. These combine to account for more than 80% of total fertilizer consumption. The majority of the growth in the fertilizer industry is happening in these five markets. China’s fertilizer consumption is 30.1%, with India (14.7%), North America (13.1%), Other Asia (12.3%), and Latin America (1.2%) lagging behind.
China imports more than 50% of its potash requirements. India and Other Asia have no indigenous potash. Latin America imports around 80% of its potash requirements while North America is a major global fertilizer market. Potash Corp is responsible for close to 20% of worldwide capacity via its Canadian operations. The company is the world’s largest fertilizer company by capacity.
Why to avoid
1. Changes in the potash sector transforming the competitive landscape
In July 2013, OAO Uralkali announced its plan to significantly increase potash production. Its goal is to attain a greater share of the worldwide potash market. OAO Uralkali ended its joint venture with Belaruskali last year. OAO Uralkali decided to undo the Belarus Potash Company, which was one of the world’s largest potash cartels.
OAO Uralkali is a major overseas producer. This past January it signed a 700,000-tonne supply deal with China at $305 a tonne for the first half of this year.
2. Lower global prices
Low potash prices are an enduring threat. OAO Uralkali ending its joint venture jolted the potash market and drove prices downward.
Consider that earlier this month, Reuters reported that Jordan’s Arab Potash Company experienced a 54% decline in its half-year net profit because of increased energy costs and lower worldwide potash prices. Arab Potash is one of the world’s largest potash producers.
Quality investing requires performing the proper due diligence on companies to asses risk factors. Potash Corp has fundamental strengths to drive investor returns. However, the tough agricultural chemicals industry demands you understand the issues that can deter growth for companies in this sector.
