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Potash Corp. to Cut Production 20 Percent; Will Pricing Be Preserved? (POT)

Posted on | December 10, 2008 Time: 3:05 am |

Potash Corp. came out late yesterday and joined the likes of Mosaic (MOS) and Uralkali in cutting production of its chief product, as they will reduce 2009 potash output by roughly 20%, beginning in January.

CEO Bill Doyle sees demand as only temporarily weak, noting a slowdown in the availability of credit and a general “wait and see” attitude from purchasers at an investor conference on Tuesday. But Doyle sees demand accelerating in the second half of the year, noting that global inventories of both fertilizers and grains remain at historical lows.

Protecting Price - The Smart Choice For Shareholders

Potash Corp. is adamant in its attempts to keep potash pricing at the levels we’re currently seeing. Along with yesterday’s production cut was the news that Canpotex - the international marketing arm of Potash Corp, Agrium (AGU), and Mosaic - signed a deal with Korea to supply potash (plus freight) at over $900/mt, in line with an earlier deal signed with Japan for 2009.

If the group of major potash suppliers (with Potash Corp. running the point) can actually pull off the preservation of pricing within potash - even above $500-$600/tonne - it will lead to a major revaluation of POT shares. Right now it seems the market just doesn’t believe pricing will hold, as shares are priced at roughly 4x the 2009 consensus estimate of $16.40

To be sure, these estimates will begin coming down today on the production cuts, but it’s hard to say how the stock will react. Fundamentals, barely useful anywhere in the markets right now, obviously got tossed out the window here as well. Shares could actually pop tomorrow, as investors may decide that a production cut from the market leader before prices break down is a good thing. It could ensure that the ongoing talks with China and Canpotex lead to a deal in the magical range of $600-$800.

Parting Thoughts

Unlike nearly every other commodity, potash supplies actually are constrained right now, and capacity upgrades anywhere in the world are costly and slow, the two scariest words a CFO can hear right now. Don’t expect high potash prices to produce a supply glut anytime soon. When global capacity does eventually double around 2015, Potash Corp. will have contributed about half of it.

Last time I checked, the world still needed food, the world’s grain silos were still low, the world’s arable land still shrinking, its nutrients depleting, and its population growing. I’m wary of the short-term volatility and noise, but I refuse to let go of the secular trends driving sustained, higher fertilizer prices.

Disclosure: Author does not hold positions in the companies mentioned.

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Category: Agriculture, China, Fundamental Analysis, Secular Trends Portfolio
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