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We’ll be joined by a guest on Tuesday’s Commodities show who huddled with industry players at the Fertilizer Institute Conference in Montreal last week and came away cutting his projections for phosphates, potash and nitrogen after finding that the industry was “more bearish than expected.”
“We advise not adding to fertilizer stock positions,” says BMO analyst Joel Jackson, who warns that “his estimates are well below consensus, and we expect broad cuts to sell-side numbers.”
In other words, he reckons other analysts are too optimistic about the industry’s profits as product prices languish - and they have yet to cut their profit forecasts. If they do so, it may not be pretty for share prices.
The industry’s problems, Mr. Jackson says, include “deteriorating supply/demand, potash market uncertainty, large Chinese nitrogen/phosphate export availability, emerging markets FX depreciation, weaker crop price expectations and Indian subsidy/demand challenges.”
He has a Market Perform rating on four fertilizer giants, Potash Corp. (POT-T), Agrium (AGU-T), Mosaic (MOS-N) and CF Industries (CF-N), with target prices that are mostly BELOW Monday’s trading prices.
For Potash Corp, trading at $32.31, he has a target of just $29;
For Agrium, trading at $86.42, he has a target of $90;
For Mosaic, trading at $43.02, he has a target of $41;
And for CF Industries, trading at $210.89, he has a target of $202.
The analyst is particularly cautious on phosphate, Mosaic’s specialty, which has slumped to the lowest price since early 2010. “Global phosphate pricing continues to slide largely due to absent Indian demand and large Chinese supply,” Jackson warned in a Sept 25 report, noting that prices for Diammonium Phosphate (DAP), the most widely used phosphate fertilizer, are at four-year lows.
The crucial problem, Jackson said in an interview, is that India’s farmers represent a vast market for phosphate, according for almost one-third of global imports, but the country’s purchasing power has been destroyed by a sliding rupee. Meanwhile, he says, “the government’s broke.” A deficit-racked government is a year behind on the massive fertilizer subsidies that now account for the second-biggest item in the entire budget after defence. And if fertilizer prices come down again, New Delhi is likely to simply cut the subsidies, thus choking off any potential jump in demand. The analyst had thought that Florida DAP prices, currently about $430 US a tonne, would rally to $518 next year but now thinks they’ll be only around $453.
There’s not much joy for potash either, with North American prices slumping to $385–400 per ton, down from $420 in July and $440–470 in the first half of the year.
Jackson had thought Midwest U.S. potash would fetch $375 next year but has cut his estimate to $361.
Meanwhile, the breakdown of the Russia-Belarus export cartel has confused the market. “Global potash price discovery continues to be limited as dealers hold back waiting for more price certainty and there is strong potential that no meaningful benchmark price will materialize for months.”
But he cautions: “We have significantly lowered potash industry earnings and if demand in emerging markets does not respond at least a little to price, potash sector earnings could go even lower than our below-consensus numbers.”
He says there is a chance that Belarus and Russia may repair their BPC alliance “with a price-over-volume focus and prices move back up to the $400s.”
But there’s a more damaging possibility too: “A large fight for volume develops quickly (with or without BPC back together) and prices move to the mid-$200s, i.e., marginal costs, attempt to shut down high-cost producers such as K+S.”
Finally, Jackson cautions that global markets for urea, one of the forms in which nitrogen fertilizer is sold, remain oversupplied and that “prices may languish through 2014… global sentiment remains bearish due to lower crop prices, a seemingly flush global channel (global urea imports have trended well above 2012 levels), concerns over the continuation of relaxed Chinese export policies coupled with continued Chinese capacity increases, new capacity in Algeria (Sorfert) and the UAE (Fertil).”
The picture is a little brighter for ammonia, another form of nitrogen fertilizer. “Global ammonia prices recently firmed off bottoms mainly driven by reduced supply (Eastern Europe curtailments and Trinidad gas supply reductions) as opposed to a meaningful pick-up in demand, but price increases appear to have stalled and we expect a pullback over the next few months.”
He had thought that Florida ammonia prices would rally to $500 next year from about $488 currently but now thinks they’ll be closer to $475.