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Why Mosaic sees a much more upbeat outlook than Potash Corp.

Part 2
Why Mosaic sees a much more upbeat outlook than Potash Corp. (Part 2 of 5)

Why potash prices have rebounded as Mosaic’s business cycle turns

Lower prices

In 2013, driven by weaker demand and increased supply, potash prices fell on average ~$130 a tonne and phosphate prices fell ~$150 a tonne. Lower prices had negatively impacted Mosaic Co.’s (MOS) sales and revenue in fiscal year 2013, which contributed to the company’s, and its peers’, underperformance in 2013.

Potash Sales Volume and Realized PricesEnlarge Graph

Higher net sales

For the fourth quarter of 2013, net sales rose sequentially, and they rose compared to the same quarter in 2013, because of a late fall application season and pent-up demand. As farmers harvested their crops later, they purchased their crops later. Uncertainties surrounding Uralkali’s departure from BPC and the future of the potash industry also pushed purchasing activities back.

The business cycle is turning

Realized potash prices continued to fall, to $303 a tonne, driving gross margin down to 21%. Despite poor performance, Mosaic Co. (MOS) sees a much rosier outlook, pointing out that the business cycle is starting to turn in the industry’s favor, as sales volume picked up and fertilizer prices bottomed in December 2013.

“Volume comes before price”

According to the company, “Volume comes before price.” That appears to be true for now, as potash prices bottomed following recent contracts with China, which have historically set the global price floor for the fertilizer.

In early January, there was speculation on the web that Uralkali would sell potash at a contract price of $300 a tonne to China. This news drove share prices for potash companies higher. The actual contract price, which was announced on January 24, was higher, at $305 a tonne for 700,000 tonnes of potash. Subsequently, China signed another agreement with Canpotex Ltd.—the offshore selling arm for Potash Corp. (POT), Agrium Inc. (AGU), and Mosaic Co. (MOS)—to purchase 700,000 tonnes of potash at $305 a tonne.

Weekly published prices for potash sold to Brazil have also been climbing, averaging $336 a tonne for the week ending February 14, 2014—up from $333 a tonne from the prior week.

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