Potash Heats Up: $1000 a Tonne?

Another very busy day....

Lost in yesterday's excitement was news that Canpotex [remember - that is an alliance of Potash (POT), Mosaic (MOS), and Agrium (AGU)] has raised spot prices for some Asian buyers to $1000/tonne. The Russians have joined as well.

Notice a trend I hope?
[Mar 27: Canpotex Potash Contracts Secured with India @ $625]
[Apr 2: Potash Makers Already Talking $750, up from $625]
[Apr 16: Chinese Agree to $576 Price Point for Potash]
[Apr 23: Potash Hits $1000 on Spot Market]

• Canpotex, the export marketing consortium for Canadian potash miners, has raised its spot price for some Asian buyers to $1,000 per tonne, an analyst at J.P. Morgan said on Wednesday.
• The new price is up 21 percent from current delivered values, and will take effect in the fourth quarter, David Silver wrote in a note to clients, quoting fertilizer industry consultant FMB Group Ltd.
• "We believe the rapid rise in offshore potash prices will put increase pressure on importers in India and China ahead of their upcoming negotiations for new supply contracts later this year," Silver wrote.
• Earlier on Wednesday, Belarussian Potash Company (BPC) said it sold 40,000 tonnes of potash to Sri Lanka at a record price of $1,050 per tonne. The BPC consortium exports the mineral for Russian miner Uralkali and Belaruskali, and had earlier hiked its spot prices to $1,000 per tonne, effective July.
• As of June, spot prices for potash exported from Canada had climbed about 200 percent from a year earlier, according to data from Potash Corp, the world's largest fertilizer company.
• Potash Corp said last week it would increase its U.S. prices by $250 per short tonne, which J.P. Morgan's Silver estimated would make the price $772 per short tonne, an increase of 48 percent.
• China, the world's largest potash importer, is paying about $660 per tonne (delivered) under a contract that expires later this year -- about triple its 2007 price -- and India, another major buyer, is paying $625 per tonne.
• Silver said he expected higher prices would boost earnings per share by $1.90 for Potash Corp, 90 cents to $1 for Mosaic, and 60 cents for Agrium.

For the few long time readers who were around last October - remember that

nasty sinkhole

in Russia? Well, it's

back at its old tricks again

.

• An emergency rail link allowing Russian potash miner Silvinit [SILV.RTS] to deliver the in-demand soil nutrient is likely to close in the next few weeks under threat from an expanding sinkhole, a senior engineer said on Monday.
• Sergei Testov, chief engineer at a power station near the sinkhole, said the link could be disrupted for at least several weeks as the government considers options for a third rail spur to move potash from Silvinit's mine in the Ural mountains.
• "We will do everything we can to build the new rail line before the old one is closed," Testov, one of the lead engineers in the rail link construction program, told Reuters by telephone from Perm region. "It probably won't be a disruption of two or three months, but for two or three weeks we will probably need to disrupt it."
• Silvinit, which accounts for over 10 percent of global potash supply, reduced shipments of the soil nutrient last year after the collapse of a 50-year-old deposit owned by rival miner Uralkali opened up the sinkhole and cut its rail link.
• Canada's Potash Corp of Saskatchewan (POT), the world's largest potash miner, suspended new sales contracts temporarily in October on fears of a global shortage following the first disruption near the sinkhole.
• "The situation is keeping us in suspense, but we are sure a crisis can be averted," said Anton Subbotin, chief spokesman for Silvinit.
• The plant is only a few hundred metres from the sinkhole, a crater 300 metres in diameter and 70 metres deep. Both Testov and Subbotin said the hole was about 100 metres from the replacement rail link completed this year, and that it was spreading toward it. When it gets to within 75 metres, local safety officials would shut it down, they said.
• "The alternative is still only in the planning stages," the engineer said. "Once the government makes a decision, in the best case scenario I think we can build it in three months."
• At a tour of the power plant last week, Testov and plant director Alexei Maltsov said the sinkhole was expanding toward the rail line at about 10 metres per week -- meaning only two or three weeks remain before the line would need to be closed. But on Monday, Testov revised this estimate, saying the expansion of the sinkhole had slowed. He declined to give a more specific estimate.

Takeaways:

1. It is unbelievable how so many people want to call the end of the commodities "bubble" - if oil falls or as the media says "plunges" over 2 days, they want to call the whole thing off. This literally has happened 4 times since last summer and each time it lasted 5-15 days, and in that time everyone says "gotcha" and then a month later the commodity stocks are screaming higher. Meanwhile the retail investor who listens to the pundits has panicked into the selloff. Shameful.
2. Even if oil goes to $105, I am unclear how fertilizer = oil... but since I'm a simple person perhaps the supercomputers at the hedge funds could better explain it to me. I know, I know crude = wheat = nickel = corn = potash = iron = coal = sugar. It's all the same thing! It's all just "one big trade" so sell 'em off! Yep.
3. In an ever increasing inflationary environment where inputs are causing pricing pressure we continue to seek the few sectors where the price increases passed from producers to their customers is at least keeping up with the cost pressures of their inputs. Fertilizer has remained one of those groups.

Disclosure: Long Potash, Mosaic in fund; long Mosaic in personal account

 

Comments

[who]

why is the stock price dropping?

with higher demand and price in 2009 at least the future earnings should be higher

[TwoBFree2]

Price is dropping, so you can buy and make a bigger profit, get it now. Buy low and sell high, or hold long term, either way, you will be a winner.

[John Egan]

"who" ... Even potash is taking a hit as it is commodity based. Also, this is options expiration week and there is a lot of profit taking to cover shorts. Lastly, I'd bet that many of the big-boys are moving their money to other venues (financials?) and probably to cash as this is probably a short bear rally.. All my opinion...

Thx jegan ;-)

[Groty]

I was with a bank that participated in a loan to TRA during the last cyclical fertilizer boom. The boom very quickly turned to bust, and TRA came very close to having to file for bankruptcy after fertilizer pricing collapsed. The stock traded down to about $1.

So, the point is that the minute the pricing cycle peaks, the stock will become toxic even though earnings won't peak for a few quarters after the pricing peak because price increases go into effect with a lag.

The stock sells off after every price increase is announced because people want to believe pricing just can't go any higher.

Is $1000/ton peak pricing? That is the only relevant question.

[will]

The MM's are playing with you today. Hope you bought. This thing sees 250 by Wed next week, 300 after earnings.

[windinmyface2]

Have faith.

[Think-About-It]

Groty summed up the POT game well:

"Is $1,000/ton peak pricing? That is the only relevant question."

But what if the price holds for a while, plus or minus 10 - 15%? Won't that turn POT into a nice fat cash cow and they can use it to expand opperations leading to greater future volume & possibly gain market share (assuming management finds acceptable deals)?

Or they could pay out heafty dividends which would support the stock price to some extent.

[fxtrader07]

many oil stocks are priced for crude at $90/bl as the stock market has not yet agreed on a permanent $110+ oil price. stocks like POT REQUIRE a further rise to $1000/t and beyond to justify current lofty P/E ratios. as usual, people chase 'grwoth' and overpay for it, extrapolating 'trends' but those trends may turn any time. In turn, lower growth but more defensive stocks like oil and gas stocks get sold even further.
gl with your POt/MOS positions - but to me there is simply too much downside risk. when the momentum folks and hedgies pile out, all of a sudden you will hear plenty of reasonable arguments why the stocks were too high. it#s risk-reward and to those citing the 'structural' argument with potash prices: structural arguments are always there. just perception change. $1000/t+ for potash prices? probable. but 2-3 years out? 1.500$ or 500$? makes the difference for a stock price of POT either at 280$ - or 80$/share.

[David White]

POT is now at its 50-day moving average. It usually bounces up from there. On days when oil goes up, POT tends to go up (probably due to the increased desire to produce ethanol when oil prices are higher). So far oil is up today in Asia. Things are looking very good for a bounce upward. Also keep in mind that POT recently raised their guidance. Remember that that was before Canpotex raised the potash price by 21%. This should eventually cause another guidance raise. Also POT reports earnings on July 24. Those are likely going to be a beat. Certainly the CEO has been very happy lately. There should be a run up before the earnings report. Further one analyst raised his one year price target for POT to $425. This was before the last potash price increase. It was also before the 2.7M tonnes extra capacity coming online announcement (yesterday). Further Corn is now trading in the 600-650 range. There is extremely strong technical support at 600. It is unlikely corn will go down further than that in the near future. In essence, there are many good reasons for POT to go up. There are increasingly few reasons for it to go down. A prediction like this can always be wrong. However, the odds for an upswing prior to earnings on July 24 seem excellent.

[Mark Anthony]

Nice DD, Trader Mark. Thanks for the update.

I believe the commodity bull is far from over. But on potash fertilizer I doubt how much longer can they sell at $1000 per ton. There are plenty of production opportunities at even a fraction of that price. POT itself actually has far more existing production capacity than it is willing to utilize currently. So it is some sort of deliberate price gauging. Will the rest of the world put up with it?

China, for example, has developed the Lop Nur Lake potash production, and speed up the expansion of production. They currently is already producing 3 million tons per year just from that source. Give another year or so China will be totally self-sufficient in potash, and say Tzai Jian (Bye Bye) to POT.

Read my recent articles on Safe Haven investments:
seekingalpha.com/autho...

[David White]

Probably the most important stock reporting today Citigroup (C) just reported a $.49 per share loss. This is actually good news because the market was expecting a $.61 loss. Also the guidance and other news from Citigroup generally seemed upbeat. It seems to be righting itself. This is great news for the market. SLB beat $1.16 PES reported vs. $1.12 expected. Ditto Mattel $.03 vs $.02 expected.

[David White]

Another important stock today, HON, beat $.96 vs $.94 expected. HON also raised guidance. Things are looking good with POT up almost 2 in the pre-pre-market.

[David White]

Corn is relatively steady so far this morning.

[David White]

Soybeans are also holding steady so far today.

[David White]

AGU target price was raised to $130 from $118 by UBS this morning. This is good news for all of the Ag stocks.

[David White]

POT target was raised to $320 from $285 by UBS this morning. More good news for Ag.

[David White]

The +$35 one year target price raise by UBS tranlates into a +$3.67 to mean target price of POT. According to Yahoo, there are 11 analysts contributing to the mean target price.

[David White]

The new mean price target would be approximately $297.

[David White]

The POT one year target price was raised from $340 to $375 by RBC. This would bring the mean target price to about $300. However, I note the last 3 raises I have seen have been to $425, $320, and $375. The average of these is substantially higher than $300.

[David White]

Perhaps importantly the last two raises, which may be at least partially due to the 2.7M tonnes news and the increase in the potash price to $1000/tonne, have been about $35 raises. If the average analyst is rasing the target price of POT by $35 based on the news cited above, this should have a nearly immediate positive impact on the share price. Specifically I am even more strongly looking for a big run up in the price before earnings are announced July 24.

[David White]

Oil has drifted downward most recently, but is still up on the day. Corn and Soybeans seem to be still holding steady.

[David White]

The Canadian Leading Indicator was steady in June from May. More relatively good news for the market.

[David White]

POT opened in the premarket at $215.38. With oil steady or up so far today (and corn and soybeans also steady so far), POT should rise dramatically on the Canpotex price increase news and the two analysts' price target increases of $35. This indicates that the news is worth $35 in the price of the stock. The average true range of POT for a day is currently about 11. I don't think the value is likely to ever be under $215.38 today (or it shouldn't be). This means that POT is likely to hit an intra day high of about $226 (possibly even higher as the news has been especially good on POT recently).

[David White]

Now it looks like someone is playing with the stock. It is racing downward just before the open. Perhaps someone is trying to scare other investors (the small guys) out of th stock. Perhaps another brokerage house trying to make a lot of money.

[David White]

I think the small guys should stick with this stock. The news is just too good today. Earnings are on the near horizon. They are likely to be great.

[David White]

Oil seems to be remaining up on the day. This should be good for an Ag stocks move upward.

[David White]

I am not sure why POT isn't up more on the great news it had today. Perhaps I just need to be patient. OR perhaps the SEC should be investigating one or more brokerage houses for stock manipulation.

[David White]

I know GS and Piper Jaffray were fined not too long ago for stock manipulation. I'm sure the SEC will look at them first. Perhaps they have written a lot of call options since oil and the market have been going down. Perhaps they want to get out of them cheaply?

[David White]

Oil is still up slightly on the day. It shouldn't be enough to negatively effect the market. However, it should be enough to allow a POT et al rebound. Grains are still reasonably steady.

[David White]

There are a fairly large number of 210 and 220 call options on POT. Probably some people were shorting the last few days also. Perhaps GS or some one else is just trying to get rid of thier shorts before they ride POT upward (or buy back their calls cheaply). Grains aren't really down today, so there is no excuse for the stock not responding to major upgrades by two well thought of brokerage firms. Plus there is the actual good news that likely spurred the increased estimates.

[David White]

Still Oil is up. Grains are relatively steady. I am still waiting for POT to take off. I would actually be interested in the data the SEC collects on GS and PJ trades today with regard to POT, if I were to complain.

[will]

Nice upgrades by UBS and RBC this morning. Really giving us a lift right?
Well, they are both selling as fast as they can and once again stealing your money. Add these upgrades to the 425 Canaccord one last week and what do you get? You get screwed for listening to these crooks while they steal your money. 3 upgrades, average PT of 390, and we are sitiing at 210. Who's shi-t--- who???

[David White]

Grains are starting to go down. However, given the news, investors should be more interested in the loner term aspects of the current scenario. GS and PJ could be amnipulating the futures markets to some slight degree also. I know Cramer has said to wait until grains start to go up. His wife is a hotshot at GS. I wonder where he might have come up with that thought? With good support for grains at their current level, the other market factors shoudl be in play here. The price increase by Canpotex, the increase capacity of POT in the future years. The upgrades in the target stock price by $35 from each analyst. Oil is up a little also. All of these things should lead to POT going up dramatically today and in the days leading up to its earnings release (perhaps afterward also).

[will]

Potash is done. The roller coaster ride is over. Stock sees 200 today.
Analysts are stealing your money.

[David White]

I know no sane individual investor, who bought the stock before these announcements, would be selling immediately after these announcements unless that investor were scared out due to manipulation. I also don't believe money managers would be getting out now. This really smacks badly of stock manipulation by one or more brokerages.

[David White]

There is extremely strong support around 600 for corn and 1500 for soy beans. It would be hard to imagine going through those support lines today. The market news is overall fairly good. This means POT and the other Ag stocks should go up fairly dramatically on the price increase news.

[Patriot Bull]

David--can you tell me where you got the info regarding the upgrades..i've tried to locate the info on CNBC, Yahoo!, and MSN Money...I'm with you that POT & MOS should both benefit from the upgrades, along with the rest of the AG sector, however, I'd like to read the articles.

[David White]

The number of open 210 and 220 calls seems to have gone up fairly dramatically since the beginning of the day. Perhaps a brokerage(s) really is manipulating the stock prices to keep any payouts in these options to a minimum. I think the SEC should perhaps really evaluate this. If this increase in call options is al being written by one or more brokerages houses, that or those brokerages would have motive to manipulate the market in these stocks lower for today (options expiration for July). They could then just pocket all the money obtained from writng the options.

[David White]

One might sell near term call options. Sell the stock. Then buy longer term call options. You could make a lot of money doing this. When you bought back the stock later, you would be driving the prices of your call options up.

[David White]

I now am seeing a much larger number of 230 call options, which expire today. This whole thing is really starting to look more and more like manipulation.

[Patriot Bull]

I do sense some sort of market manipulation. Can you tell me where you read about the upgrades today? I've been LONG POT since Jan., but never cashed out on the peaks (dumb move on my part) because I'm thinking long term.

[David White]

Alternatively, if you are GS (or some similar brokerage), you might short a stock with good news out. You start a run on the stock. Then you buy your shorts back before everyone else gets on the bandwagon, knowing that the fundamentals are there for the stock to do well shortly after you buy back your shorts (and then buy the stock for itself). If you work in conjunction with your options arm, you make even more money.

[Think-About-It]

Does a bear shit in the woods?

[David White]

Both ABX and GG were given target price upgrades today. This is another indication that commodities are now healthy again. This also means that there is even more reason for POT and the other Ag stocks to go up today.

[David White]

The upgrades came over the DJ wire. I used StreetSmartPro to see them. The two brokerages also reiterated Buy ratings on POT. Ditto AGU. I still haven't seen POT really break its uptrend yet. Even today it can probably soon go up again. Then it will agian be above its 50-day moving average. This is its typical behavior.The futures charts indicate a strong support level for both corn and soybeans at aproximately the current prices. Cramer said that he wouldn't buy until these prices started going up again. I think they are flattening. Probably the stocks wil start to go up again next week after option expiration today. That way whoever is manipulating the stocks can max out their gains. I really do think one or more brokerages are doing just that. They get everybody thinking negatively about the stock. Then they buy it, and they ride it up. Sounds like something GS would do. The option scheme is also a real possibility. The Shorting one is probably a better possibility. Earnings are next week for POT. I expect them to be great. After we small guys get discouraged this week, the big manipulator guys will likely make a ton of money next week riding the stock, POT, up. They probably make good money this week too.

[David White]

I should say that there is nothing in the DJ news articles except the title indicating the specific target price increases (and by whom). This is a typical message from DJ. I am 99.999% sure they are legitimate messages.

[Groty]

To Think About it:

You asked:

"But what if the price holds for a while, plus or minus 10 - 15%? Won't that turn POT into a nice fat cash cow and they can use it to expand opperations leading to greater future volume & possibly gain market share (assuming management finds acceptable deals)?

Or they could pay out heafty dividends which would support the stock price to some extent."

All true. But once pricing moves as far above marginal cost as potash is now, the rational response is for producers to eagerly bring new capacity online as soon as possible. It takes years to bring new greenfield mines online, but once the consensus is overwhelming convinced pricing has peaked, I'd expect the stock will start a slow stready grinding down. That's been my experience with how cyclicals trade.

'09 estimates for POT have already doubled in the past 90 days. AFTER those estimates were raised, the sell side is now falling all over themselves to increase their price targets and ratings on the stock.

I don't like it. I'm very cautious.

If pricing hasn't peaked, then some hedge funds will sniff it out within the next few weeks and start buying again. I'll wait for the market action to tell me it's time to get long again.

[David White]

I should note that meat and livestock are generally up today. They require Ag products to feed the livestock. This is bullish for Ag to some degree.

[David White]

If you had seen Bill Doyle (POT CEO) and the other potash company heads on Fast Money, you would probably not doubt the numbers so much. If Bill Doyle is any indication, the numbers are more than legitimate. I expect the stock will do extremely well through earnings. I think some brokerages may be beating it down at the moment, so they can make more money riding it up. They probably also made money riding it down. Certainly there is the bear story. However, the potash stocks have given no indication of that they are susceptible to the bear market. Food is a staple. Potash is used to make food. Staples do well in a bear market. Anyone who is trying to say these stocks are broken for the short term is quite simply wrong. Longer term there may be an issue. Still they are extremely attractive for the moment, especially with the price target raises. There is a worldwide supply and demand (i.e. short on supply) situation playing out. As China and India become richer, they will use more food. This is inevitable. This will put a greater demand on food prices. This in turn will put a greater demand on potash prices.

[David White]

Besides these last two price target increases seemed to be directly related to the news about the Canpotex price increase. Other price increases are likely on top of this one.