Don Coxe Market Comment On Potash: unexpected buying opportunity
bullmarketthinking.com
[Yesterday] morning began with the collapse in the price of leading fertilizer stocks, led by a 22% sell-off in the world’s pre-eminent holder and producer of potash, Potash Corporation of Saskatchewan (POT)—a mainstay in portfolios of Canadian and global commodity stock investors.
The plunges were triggered by word out of Russia that Uralkali (URKAG), now the biggest potash producer (but not the biggest owner of potash reserves—that’s Potash Corporation) is breaking up a marketing venture with Belarus that controlled 43% of global potash exports, in a grab for market share.
Canpotex is the longstanding joint venture (or cartel) that sells potash produced in Saskatchewan, which has—by far—the biggest potash reserves. Investors will recall that when BHP Billiton was bidding to buy Potash Corporation, it said it would produce flat out and would not be part of the joint venture—one reason Ottawa turned down the deal. (We were strongly opposed to that bid, and insisted that the Government of Saskatchewan—not Ottawa—had the rights under Canada’s Constitution to decide whether the deal should go through.)
Bizarrely, shares of fertilizer companies that produce the other key nutrients—nitrogen and/or phosphate—have also plunged. For example, our take on the 12% sell-off in MBAC Fertilizers which is a new Brazilian producer of phosphate, is that any portfolio manager who sells shares of non-potash-producing fertilizer companies in response to this Russian shock should be prevented from managing other people’s money. It makes as much sense as Rogers announcing it is writing down its investment in the Blue Jays because the Maple Leafs didn’t make it to the second round of the Stanley Cup playoffs.
One likely result: BHP Billiton will surely reconsider its already dubious plan to proceed with opening its Jansen mine in Saskatchewan. It looked to us that it was going ahead with this high cost project partly out of pique that it hadn’t snagged Potash Corporation. Its pique may by now have peaked.
Farmers benefit from cheaper potash, but the biggest winner if this Russian brazenness continues will be India, which must import all the potash its farmers need—and the Green Revolution significantly increased its farmers’ demand for potash. The subsidies Delhi has been paying for potash have been costly, so the beleaguered government will doubtless be rejoicing—and crossing its fingers that the price collapse lasts.
Among the mourners may be the foodies who oppose all use of fertilizers except manure, so cheaper potash will mean greater usage. We aren’t shedding any tears for them.
Conclusion:
In fact, potash prices have been under pressure globally for two years. As investors, we have had far bigger exposure to the other fertilizers than to potash, so the sell-offs in shares of those companies gives us an unexpected buying opportunity. As for Potash Corporation’s stock price, if it gets to levels that discount absurd potash prices, we and other seasoned investors may find a bargain we can’t refuse.
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