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An investor's guide to PotashCorp's 1Q14 and forward outlook

Part 2
An investor's guide to PotashCorp's 1Q14 and forward outlook (Part 2 of 11)

PotashCorp’s 2Q earnings to benefit from higher fertilizer prices

Potash and phosphate prices

If we were to pick one direct indicator that has the largest influence on potash and phosphate stocks such as PotashCorp (POT), Mosaic Company (MOS), Intrepid Potash, Inc. (IPI), and Sociedad Quimica y Minera de Chile (SQM), it would be fertilizer prices (or the expectation thereof). This isn’t surprising, considering that fertilizer prices have more than doubled over the last ten days. Given that mining companies’ costs are largely fixed, earnings have moved more dramatically.

Fertilizer Average Realized PriceEnlarge GraphWeak two years

For the last two years, potash and phosphate prices have done poorly. They were negatively affected by unfavorable subsidies in India and movements in currencies, slowdown in emerging markets’ growth, food inflation and lower crop prices, additions of new capacity, dealers and distributors’ decision to hold lighter inventory, and the fall out of partnership between Belaruskali and Uralkali (the other two major potash suppliers in the international market aside from Canpotex—Canadian Potash Exporters). The Market Vectors Agribusiness ETF (MOO) was also negatively affected.

Realized prices

During the first quarter of 2014, PotashCorp’s average realized price for potash and phosphate stood at $250 and $484 per metric tonne, respectively (realized prices exclude delivery fees). Phosphate prices rose for the first time since the fourth quarter of 2012, while potash prices continued to slump.

Higher second quarter earnings

However, keep in mind that company prices are lagging, because these are quarterly averages, and some sales are agreed upon ahead of delivery dates. Since the start of the year, potash prices in the spot market have strenghthened on the back of higher demand and stronger market fundamentals. This should translate to higher average realized potash prices for PotashCorp (POT) in the second quarter, although this has been priced into the stock already. Whether PotashCorp (POT) and its peers will rise higher or down in the future is going to depend on changes in market expectation and realized potash and phosphate prices.

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