Too Much Fertilizer Is Never Good
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The global fertilizer industry was once one of the hottest investment sectors, ranking right up there with technology stocks. Think back to just two short years ago in 2010.....
BHP Billiton ADR (NYSE: BHP) launched a hostile $39 billion bid for the leading fertilizer producer, Potash Corporation of Saskatchewan (NYSE: POT). The takeover, however, was blocked by Canadian regulatory authorities. Then there was the three-way battle between Agrium (NYSE: AGU), CF Industries (NYSE: CF) and Terra Industries. Not to mention Brazil's Vale S.A. (NYSE: VALE) paying $5 billion for fertilizer assets obtained from the Mosaic Company and commodities trader Bunge.
But now conditions have changed as sustained prices for fertilizer have led to an investment boom in the sector. New entrants, such as BHP, have entered the industry in a substantial way and existing companies have also splurged on expansion. In total, $90 billion has been spent in the fertilizer investment spree over the past several years.
The expansion of fertilizer production capacity is all a result of still historically high prices for fertilizer, although they are down from the peaks hit a few years ago. Potash is trading at roughly $469 a ton, down from the $1,000 a ton peak in 2008, but still substantially up from the below $200 level in 2005. Urea (a nitrogen fertilizer), which was also around $200 a ton in 2005, is still trading around $540 a ton, down from its peak of $800 a ton in 2008.
New data from the normally bullish International Fertilizer Association (IFA) paints a rather gloomy picture for the industry in the years ahead thanks to 250 new plants coming online, leading to excess supplies. It warned of “large potential surpluses” by 2015 for the nitrogen fertilizer segment and was even more worried about the situation in the potash sector.
The association estimates expansion plans will boost global nitrogen capacity from 17 to 25 percent by 2015 from 2011 levels. It also predicts phosphate fertilizer capacity will expand 20 percent by 2015. But the good news for this particular segment is that during the same time frame, demand is projected to rise by roughly the same amount.
The bad news is really in the potash sector. The IFA forecasts that a potential surplus of 7.9 million tons of potash could hit the global market over the next four years. The International Fertilizer Association points to the 30 potash-related projects worldwide being planned for completion by 2015. If all the potash production comes online by 2015, there could be a surplus of as much as 15 million tons according to the association. This translates into a 42 percent increase in supply by 2015 while demand for potash is forecast to rise by only 14 percent in the same period.
This is not good news for Potash Corporation and other potash producers as potash sales have already slowed substantially in 2012 due to the global economic slump, which is causing buyers to defer their purchases. The only thing that could change this scenario is if some players in the industry decide to defer their planned expansion. But that still will leave significant potash capacity expansion as new entrants such as BHP proceed with their plans. BHP is considering spending as much as $12 billion in developing the Jansen potash mine in Saskatchewan.
Bottom line for investors? Avoid the sector (except for maybe phosphate fertilizer) until cutbacks in planned production expansions are announced by several of the larger players in the industry.
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