During the commodity bubble of 2003-2008, potash was one of the hottest commodities surging from $200 a ton to a staggering $1000 a ton in June of 2008. The market was in love with stocks like Potash Corp, Mosaic, and Agrium. Analysts were constantly raising their price targets and boosting earnings projections due to strong fundamentals. The general market wisdom at the time was that investing in potash companies was a no-brainer because "people have to eat" and "farmers have to buy potash." They were thought of as recession proof stocks and considered safe investments. This market enthusiasm did not last long as investors dumped potash stocks during the market crash of 2008 and have largely stayed away from the sector through 2010.
The potash market has suffered from low agricultural prices, obstinate farmers, and a deflationary environment thanks to large excess capacity within the industry. These factors have lowered the price of potash on world markets all the way down to around $350 a ton. In response to lower prices, the official potash cartel known as Canpotex has dramatically reduced potash production to keep prices artifically high. While the cartel itself has done an excellent job manipulating the market, its brethren in Belarus, known as the Belarusian Potash Company, have been very keen on selling potash at the market's prevailing price (they need the money).
The question is: Will the market will turn around any time soon? I believe the answer is no because the supply/demand fundamentals just don't merit any sharp increase in potash prices. Demand remains weak (estimated at between 45-50 million tons) and their is ample excess capacity (60-68 million tons). Another factor is that farmers have shown themselves quite willing to reduce or completely halt potash applications for their crops if prices spike too high. In fact, potash prices at $350-400 are historically high when you consider that for a long time during the 80's and 90's the price of potash was below $200 a ton. A further nuance in the world market for potash is the increasing power of China and India which have become two of the largest buyers. Recently both countries have taken hard lines against Canpotex and have won major price concessions. These annual price negotiations have become the benchmark for world prices, and as long as China and India hold the line, they can help keep prices low. I also wonder how long the Canpotex cartel will be able to keep members fully compliant with production quotas. So far, the members have cut production by approx. 6 million tons since 2008, but prices have continued to fall nevertheless. At a certain point it may make more sense for some Canpotex members to quit the group and increase production. After all, they are leaving a lot of money on the table as potash at $350-400 a ton is still very profitable.
Another negative factor for potash supply/demand is the entry of BHP Billiton into the market with their Jansen Mine. According to BHP, Jansen will have an estimated output of approx. 8 million tons of potash and will begin production in 2015. More importantly, BHP had indicated that it will not likely join the Canpotex cartel because it has little need and does not want to have its production restricted. BHP will be more interested in selling as much potash as it can to recoup its significant investment, which is estimated at over $8 billion. If BHP refuses to join the potash cartel, it could put Canpotex out of business as it becomes less relevant in world markets.
In conclusion, I see little reason for potash prices to pick up from here, which means that potash companies will continue to lag the market. Investors need to look past simple cliches such as "people have to eat" and so on to better understand the fundamentals of the potash industry. We have learned over the last two years that people do indeed need to eat, but that does not mean farmers have to pay $1000 a ton for potash. Those lofty price levels show no signs of returning in the future. If anything, prices could revert to their normal level of around $200 a ton, which would make potash stocks poor investments.
Black Swan Insights