HSBC Maintains Cautious Stance On Fertilizer Group; Downgrades Potash, Mosaic

Global fertilizer prices have been under pressure. HSBC’s Yonah Weisz mentioned that the sustained pressure on fertilizer prices is likely to test the ability of manufacturers to weather their impact.

“The lack of industry visibility, higher volatility, and negative macro trends (crop prices and fertilizer affordability, general economic concerns, currency weakness) lead us to become more cautious in valuing the sector,” analyst Yonah Weisz wrote.

Low costs and high exports are likely to keep urea prices largely dependent on Chinese producers, while potash price remain directionless owing to the absence of a Chinese supply contract, the analyst commented. He added that DAP prices are dependent on renewed buying from India.

Cautious Stance On Companies With Nitrogen Exposure

Weisz expressed concern regarding companies that have nitrogen exposure and those that may find it difficult to deal with long periods of depressed prices. There could be a significant decline in the urea prices in case Chinese input costs continue to decline, while export levels remain stable.
Manufacturers may need to improve their cost structures, cut dividends or modify their capital spending and debt levels to deal with the situation, Weisz added.

Potash Corp

The analyst downgraded the rating for Potash Corporation of Saskatchewan (USA) POT from Buy to Hold, while reducing the price target from $21 to $16.75. He mentioned that the company’s exposure to nitrogen fertilizer, especially ammonia, and a “less than Ideal cost base” point to payout risks.

“The Q4 15 debate on Potash Corp’s dividend – which was eventually cut to USD1 from USD1.52 when the company reported FY15 numbers – probably deterred investors from increasing holdings in the name,” the HSBC report noted.

Keeping aside the payout risk, Potash continues to have an excellent potash positioning. The company’s cash costs are expected to decline with the coming online of its large and cheap Rocanville mine in 2017.

Mosaic

Weisz downgraded the rating for Mosaic Co MOS from Buy to Hold, while reducing the price target from $35 to $26.50.

“We like Mosaic given its exposure to the positive long-term trend in phosphates, where we continue to see signs of rational industry behavior. On a more tactical basis, phosphate production is inherently short nitrogen, as ammonia is a raw material used in making DAP,” the analyst wrote.

Weisz believes that Mosaic’s $100 billion cash buffer will be adequate to help the company deal with the fertilizer pricing pressure without cutting its dividend. He added, however, that in a low price potash environment, the company’s relatively high potash production costs will depress earnings.