Risks: A must-read before investing in PotashCorp
PotashCorp (POT) seems like a strong company ready to regain appetizing growth rates, but investors should be aware of the risks that could hinder this growth. These risks are mainly industry related developments that could affect all fertilizers companies. These include lower fertilizer prices due to large supplies, cost related risks and
Fertilizer prices are a key indicator for PotashCorp
The main reason for which fertilizer companies have outperformed is low fertilizer prices. Over the past two years, potash has decreased by around 30%, urea (nitrogen) by 25%, and MAP and DAP (phosphate) by 15% and 13%, respectively.
One of the reasons for these price drops is increasing supplies. Many companies have finished expansion programs which means increased capacity. Overcapacity increases the risk of oversupply and therefore lower prices. In the case of PotashCorp, the company is running its potash facilities at a 59% operating rate. Companies will want to use their new facilities and increase supply, which could easily keep prices low. Other reasons for lower prices include lower Indian demand due to subsidies cut, lower emerging markets growth, and weaker international currencies.
It is worthwhile to note that PotashCorp’s nitrogen and phosphate activities are more diversified than those of its peers, lowering this way the damage of potential price drops.
Difficulty decreasing costs and fear of increasing supply costs
Analysts have stated that PotashCorp, similar to SQM, production expenses are at the lower end of the cost curve. This is positive for the firm in that margins are higher, but it also difficult growth. There is so much that economies of scale can provide to lower costs and it seems like PotashCorp is near those limits. In more intuitive words, it is going to be hard for PotashCorp to reduce its already low costs. Peer Intrepid Potash (IPI), for example, has the opportunity to increase profits by lowering already high costs of production through more modern facilities.
Furthermore, there is the risk that raw materials prices increase, causing margins to decrease. Investors should be on the look for cost drivers such as natural gas, sulfur, ammonia and even labor costs.
The demand side –turbulence in emerging markets
Emerging markets currently represent one of the most importing growth prospects for fertilizers companies. Recently, this market has been had difficult moments, increasing the risk for lower-than-expected demand.
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