Potash Producers Hopeful About Rising Demand

A recent study conducted by the International Fertilizer Industry Association (IFA) has suggested a possible pick-up in fertilizer demand by the second half of this year. This led most of the fertilizer giants such as Potash Corp of Saskatchewan (POT), Intrepid Potash (IPI), Terra Industries (TRA), Agrium (AGU) and CF Industries (CF) to witness a surge in their stock prices.

Since late 2008, the fertilizer industry has been adversely affected by slackening demand. Lack of confidence, limited access to credit, and lower grain prices led farmers to either defer fertilizer purchases or reduce application rates. Consequently, as the study showed, fertilizer consumption fell 14% in the first half of this year.

Notwithstanding, the potash cartel (accounting for 75% of the global potash capacity) has deliberately cut production to keep pricing unaffected. About 40% of the global potash production capacity has been idled since the second half of 2008.

The IFA has forecasted a consumption growth of 3.6% for fertilizer by the end of this year. This should relieve the potash producers as they have refused to lower prices in anticipation of a possible recovery in demand.

However, the IFA study has also gone on to indicate a possible surplus in global fertilizer supply in the long run. This is due to the weak demand for fertilizer in the recent past and new production projects undertaken by many countries. Consequently, the potash cartel may no longer be able to sustain its price control and may end up conceding to price cut in the long run as well. This looks like a pitfall for the potash producers.

We continue to recommend AGU, CF and POT as Holds.