What follows is an excerpt from Canaccord Genuity’s Morning Coffee Report
It’s been a tough couple of days for potash equities globally. When the largest and third largest potash producers have a public dispute about volumes and price that leads to the largest producer stating that pricing could move lower by 25%, nothing positive comes from that.
On Tuesday, Uralkali (the world’s largest potash supplier) announced that it will no longer be a member of BPC, the potash trading arm it had jointly sold potash through with Belaruskali (third largest potash supplier), due to statements by Belarus’ President last December where he said that Belaruskali could sell product outside of BPC.
Uralkali claims that Belaruskali has hurt the fundamentals of the potash market and that going forward potash prices could drop 25% in the future as a result, highlighting that prices could decline from US$400 per to below US$300 per tonne (US$400 per tonne was the most recent contract price from China).
Furthermore, Uralkali has relaunched rail shipments to China and is intending to significantly ramp up global sales in 2014 (to 13.5 million tonnes from 10.5 million estimated in 2013). Uralkali has effectively launched a price war if it intends to go down that path.
On Wednesday, analyst downgrade potash equities worldwide – price targets were dramatically slashed in most cases.
Potentially what are the other shoes to drop?
Canaccord Genuity analyst Keith Carpenter sees scenarios that could arise from this new strategy, too many to list, but highlighting a few scenarios going forward.
Potash Corp. could lower production further, in the hope of offsetting the increase tonnage that Uralkali intends to sell. Pricing still moves lower but Potash Corp. volumes are negatively impacted.
1. Everyone decides to move volume over price, such that, the majority of the potash producers end up with the same market share they had prior to this announcement, but prices are lower;
2.Over the long term, this should force some projects owned by companies with large balance sheets to rethink their strategy and postpone or cancel some of those developments. However, we would still expect some of these developments to enter production, which would add to greater pressure on the volume over price strategy; and…
3.Both Uralkali and Belaruskali will realize that this is a poor strategy that will most likely result in little change in market share over time, but will lower pricing and force them to want to reverse course.
The issue with this scenario is that it is always more difficult to increase price than to lower it.
Meanwhile here is a look at how the main potash names were doing Thursday.
Potash Corp. of Saskatchewan Inc. (
TSX: T.POT,
Stock Forum), the market leader, recovered some lost ground, rising 2.25% to $30.47 Thursday, leaving a market cap of $26.4 billion, based on 866.9 million shares outstanding. The 52-week range is $45.13 and $29.78.
Mosiac Co. (
NYSE: MOS,
Stock Forum) rose 1.7% to $41.80, leaving a market cap of $17.8 billion, based on 425.8 million shares outstanding. The 52-week range is $64.65 and $39.95.
Karnalyte Resources Inc. (
TSX: T.KRN,
Stock Forum) saw its stock price drop 2.3% to $2.91, leaving the company with a market cap of $82.4 million, based on 27.5 million shares outstanding. The 52-week range is $9.65 and $2.80.
Passport Potash Inc. (
TSX: V.PPI,
Stock Forum) was unchanged at 13 cents, leaving a market cap of $23.8 million, based on 183.6 million shares outstanding. The 52-week range is 26 cents and 11.5 cents.