Is Your Favorite Stock About to Fizzle?

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One industry that grabbed eyeballs as 2013 kicked off was fertilizers. Companies dealing in potash were at the forefront as deals flew in from two of the most important markets for the nutrient. The contracts that the cartel Canpotex, which includes PotashCorp (NYSE: POT), Mosaic (NYSE: MOS), and Agrium (NYSE: AGU), bagged from China and India early this year is kind of old news by now. But its repercussions still aren't.

Most are pegging it to be a good year for potash players as these deals perk up sales volumes. But what about prices? If potash prices fail to look up, the euphoria might be short lived.

Losing ground?

Potash prices have been on a downward spiral since the second half of 2011, hitting the top lines of all the companies thriving on the nutrient hard, including Intrepid Potash (NYSE: IPI)

<img alt="" src="" />

POT Revenue Quarterly YoY Growth data by YCharts

Each of these companies realized lower selling prices in their last quarters. I have pulled out the average selling price data for the companies for their third and fourth quarters for both 2012 and 2011 to give you an idea. The first table reflects prices in North America while the second shows offshore realized prices. Look closely, and you’ll realize where the real problem is – it’s the offshore markets where the price drop was steeper in the last quarter.

<table> <thead> <tr><th colspan="5">North America </th></tr> </thead> <tbody> <tr> <td>Company</td> <td>Q4 2012</td> <td>Q32012</td> <td>Q4 2011</td> <td>Q3 2011</td> </tr> <tr> <td>Potash</td> <td>447</td> <td>466</td> <td>514</td> <td>533</td> </tr> <tr> <td>Mosaic</td> <td>472</td> <td>479</td> <td>433</td> <td>520</td> </tr> <tr> <td>Agrium</td> <td>491</td> <td>564</td> <td>581</td> <td>597</td> </tr> <tr> <td>Intrepid Potash</td> <td>479</td> <td>489</td> <td>548</td> <td>539</td> </tr> </tbody> </table>

Prices in $ per metric tonne

<table> <thead> <tr><th colspan="5">Offshore markets</th></tr> </thead> <tbody> <tr> <td>Company</td> <td>Q4 2012</td> <td>Q32012</td> <td>Q4 2011</td> <td>Q3 2011</td> </tr> <tr> <td>Potash</td> <td>339</td> <td>398</td> <td>401</td> <td>406</td> </tr> <tr> <td>Mosaic</td> <td>352</td> <td>404</td> <td>393</td> <td>400</td> </tr> <tr> <td>Agrium</td> <td>326</td> <td>333</td> <td>386</td> <td>401</td> </tr> </tbody> </table>

Prices in $ per metric tonne (Note: Agrium reports per tonne basis. 1 metric tonne= 2205 pounds and 1 tonne=2240 pounds)

Both PotashCorp and Mosaic reported sharp falls in offshore selling prices in their last quarters. Intrepid Potash is not a part of Table 2 because it sells almost the entire produce in domestic markets. Of these, Agrium is least affected because as much as 80% of its business comes from nitrogen. But you can see how painful global markets have been.

Where’s it headed?

The recent Canpotex deals should improve situations. Both China and India waited for several quarters to let potash prices ease before signing fresh deals. The latest contract with China entails supply of 1 million tonnes of potash averaging $400 per tonne through June 2013. With India, it’s 1.1 million tonnes at $427 per tonne through January 2014. As these prices are a decent upside to what potash companies sold at last quarter, they could well act as a support. So the downside appears limited here.

Prices in the U.S. should also find support in the upcoming spring season. Here’s some quick January data to give you an idea of what’s going on in the North American potash market:

  • Production was 5% lower sequentially and 18% lower year-on-year, while inventory declined 1% sequentially.
  • Domestic sales climbed 3% sequentially and a significant 67% year-on-year.
  • Potash exports inched 13% and 38% higher sequentially and year-on-year, respectively.

In short, demand is strong ahead of the U.S. spring planting season. At the same time, companies aren’t working at full capacity. This should balance out demand and supply better, thereby supporting potash prices.

An added agony

Let me also quickly touch upon the situation in phosphates, the other important nutrient each of these companies, except Intrepid, deals in. The situation isn’t too good here as key customer India is yet to place orders for the year. Phosphate prices seem to be stabilizing though after witnessing some pressure last year. Average MAP January-February prices stood at around $565 per tonne compared to $551 same period last year. This bodes well for every phosphate company. That includes CF Industries (NYSE: CF), which gets a little under 20% revenue from phosphates. The rest comes from nitrogen.

CF is banking on the U.S. spring in near months while expecting India and Latin America to push up sales during the latter half. But if India doesn't order soon, these companies might have to cut down production as inventory has consistently risen since October 2012 and is well above the five-year average. Comparatively, demand has softened over the period. Prices might find it hard to sustain unless demand picks up.

The Foolish bottom line

Those who still remember the days of 2008 when these companies were reaping in huge profits as potash prices skyrocketed to nearly $900 per ton might as well wipe off those memories. It might be too short-sighted to say that potash may never see those prices again, but it is likely to take years.

Nevertheless, 2013 will be a recovery year for potash companies if spring planting turns out as good as last year’s. Higher sales volumes coupled with better prices should be the probable scene that plays out. And if positive news from India hits headlines, you’ll know what’s behind the good-looking numbers from fertilizer companies this year. Stay tuned as I keep you updated on news and developments about each of these companies. 

Neha Chamaria has no position in any stocks mentioned. The Motley Fool owns shares of CF Industries Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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