Why potash companies may be great for value investors

Part 11
Why potash companies may be great for value investors (Part 11 of 11)

Why China may drive Uralkali’s record 60 million mt potash estimate

An interesting 2014

2014 will be pretty interesting for the potash industry and its respective companies. As operating rate improves based on cuts in operating capacity, potash demand may even benefit from current attractive prices. Indian demand could still remain weak with a weaker rupee and an unfavorable subsidy that continues to favor nitrogenous fertilizers.

Global InventoryEnlarge Graph

Worldwide inventory is low

But inventory worldwide is now lower than at the end of 2012. This is particularly considerable in China and North America. Uralkali’s recent presentation showed that China’s 2013 December inventory is estimated to come in at around 3.5 million metric tonnes, significantly below the 4.9 million metric tonnes at the end of 2012. With all these inventories withdrawing, Uralkali expects customers to rebuild depleted inventories during 1H 2014 if there’s enough demand impetus.

Note that global economic activity and food inflation are important factors that could affect demand (as noted in our potash overview series). But demand could even be supported, as buyers know that Potash Corp. (POT) is doing its part to reduce production, which means prices may not fall much lower soon and could even rise.

China AffordabilityEnlarge Graph

Plus, potash affordability in China is approaching its most favorable level in more than a decade. These levels have coincided with strong demand growth in the past. If this holds true, then we may even be in for a surprise in 2014, even though we’re seeing falling potash prices at the moment with no large catalyst for corn price to rise.

Recovery in Potash DemandEnlarge Graph

While Potash Corp. (POT) currently sees 55 to 58 million metric tonnes in demand for 2014, Uralkali sees a record of approximately 58 to 60 million metric tonnes of potash demand in 2014. If these assumptions do realize, which the market is right now still uncertain about, share prices of POT, Agrium Inc. (AGU), Mosaic Co. (MOS), Intrepid Potash Inc. (IPI), and the Market Vectors Agribusiness ETF (MOO) will surely benefit.

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