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Why investors should follow Potash Corp.'s earnings call

Part 3
Why investors should follow Potash Corp.'s earnings call (Part 3 of 5)

Potash Corp. managers are optimistic about future potash demand

Optimistic outlook

Despite current weakness in sales and prices, Potash Corp. (POT) sees a more optimistic future for potash, which is positive for other potash producers like Intrepid Potash Inc. (IPI), Agrium Inc. (AGU), and Mosaic Co. (MOS). The company currently estimates its potash shipments to reach 53 to 54 million metric tonnes this year and forecasts 55 to 58 million metric tonnes of KCl (potassium chloride) in 2014.

Potash DemandEnlarge Graph

Sales to China are expected in the fourth quarter

Canpotex, which is the international marketing and sales arm of major Canadian fertilizer producers including Potash Corp. (POT), Mosaic Co. (MOS), and Agrium Inc. (AGU), is expected to sell potash to China during the fourth quarter. As negotiations on new contracts continue, managers believe deferrals throughout October have led to lower inventory levels, which could boost purchases early next year. In their Q&A, managers stated that current inventory levels are below the historical average.

India remains uncertain

In India, buyers continue to face pressure from a weaker rupee and an unfavorable subsidy policy that favors nitrogenous fertilizers, which makes potash more expensive for farmers and retailers—lowering purchases. Although managers have stated that Canpotex has contracts with India through March of 2014, the timing and terms on remaining shipments are still uncertain, despite having renegotiated lower prices in September and October with major importers.

Demand is expected to increase

While there are many uncertainties, Potash Corp. (POT) expects potash sales to reach 55 to 58 million metric tonnes of KCl in 2014, on the foundation that buyer deferrals have historically led growth in demand. A recent report by Uralkali suggests an even higher figure of 58 to 60 million tonnes due to price drops, which would make 2014 a record year.

Breakdown of demand forecast

Key assumptions for the 56 million metric tonnes of shipments include an increase of 0.5 million tonnes from China, ~0.3 million tonnes from India, ~1 million tonnes from the United States, and a few hundred thousand tonnes from Latin America. Managers right now don’t expect a lot of growth from India before its elections, which will end by May 2014. So you could view any positive announcements of increased demand before then as positive for the earnings of potash producers like Potash Corp. (POT), Intrepid Potash Inc. (IPI), Mosaic Co. (MOS), and Agrium Inc. (AGU). This would also benefit the Market Vectors Agribusiness ETF (MOO).

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