Credit Suisse On Potash Stocks: No Longer About Price, Volumes Key
In a note published midday Tuesday, Credit Suisse tried to make sense of the recent volatility in potash stocks.
Stocks including Agrium (NYSE: AGU), Mosaic (NYSE: MOS), and Potash (NYSE: POT) declined sharply Tuesday on news that one of the two large European potash cartels was breaking up and that prices in the market were to tumble.
The End of An Era
"Following Uralkali's announcement to exit BPC resulting in a dramatic change in its marketing strategy from price-over-volume to volume maximization, we remain cautious on potash producers despite today's precipitous price declines," wrote the analyst team at Credit Suisse led by Semyon Mironov and Christopher S. Parkinson.
"Uralkali expects to operate at 100% capacity utilization next year (capacity of ~13mm tonnes), capturing market share at the expense of lower prices. In our opinion, other potash suppliers globally will follow suit, thus resulting in the end of a supply-disciplined industry and the beginning of a new era."
Pricing to Remain Under Pressure
The drop in prices is due to all of the major suppliers of potash increasing production to gain market share as prices fall. As such, there will be continued downward pressure on spot prices as supply ramps up. Credit Suisse sees prices falling from near $400 per ton now to $370 in the fourth quarter with China signing a large contract in the $350 per ton range later this year. "For 2014, we believe a Chinese contract is likely to settle in the $300/t cfr range."
"Despite the near and intermediate term headwinds, it is clear that the LT potash supply side overhang is overdone," continued the analysts. "It is important to consider the following positives of higher operating rates and lower price, including (1) positive effects on global demand, particularly in emerging markets such as India, and (2) although it is unlikely that most players will be operating near full capacity, there will be significant reductions to the average cost per ton."
"In our view these are powerful offsets from moving closer to a spot market, but note these positive themes are unlikely to help sustain the valuation premiums of key producers."
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Shares of potash producers dropped sharply in Tuesday trade on the news. Agrium fell 5 percent in afternoon Tuesday trading while Mosaic fell 17.98 percent and Potash declined 18.28 percent.
The analysts did not alter estimates on individual stocks as of the release. Agrium was last rated outperform at the bank with a $122 price target and Mosaic was rated neutral with a $65 price target while Potash was rated outperform with a $43 price target.
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