By Leia Michele Toovey- Exclusive to Potash Investing News
The numbers are in from February, and after dropping for the second straight month,global potash inventories are now 16 per cent below their priorfive-year average. Total inventories are now sitting at about 2 milliontonnes, equivalent to approximately a month and a half supply of potashfor the world.
Throughout the recession, stockpiles climbed as low crop prices anda lack of capital forced farmers to skip fertilizer applications.Roughly 93 per cent of global potash production is used as fertilizer.With the spring planting season just underway, supplies are bound totighten.
In North America, inventories have now fallen for a fourth straightmonth. North American potash inventories remained well above thehistorical average through the course of 2009 as producers werereluctant to lower potash pricing, despite a sharp decline in demand.Potash traded at about $150 a tonne through the first half of the lastdecade, but the price soared to more than $1,000 a tonne at the heightof the commodity boom in 2008. Potash bottomed out during therecession, hitting $350 per tonne at the end of December 2009.Currently, potash prices in the U.S. have edged up to $425-$450 pertonne. The key price point for the crop nutrient is $450 – one thatis still affordable for farmers, yet profitable for producers.
In evidence that the market is staring to turn around, Potash Corp. of Saskatchewan,the world’s top potash producer, aggressively hiked its earningsforecast for the current quarter. Last Friday, Potash Corp increasedits earning forecast to $1.30-$1.50 per share, up from its previousprediction of
.70-$1.00 per share. Analysts have estimated earningsof
.94 per share. What was the reason for the move? “Strong farmerreturns, a depleted distributor pipeline and the agronomic need toreplace soil nutrients have kick-started potash rebound from 2009lows,” said Potash Corp president and chief executive Bill Doyle.“While we know that growth does not follow a straight upward line, webelieve the increase in potash sales volumes this quarter representsthe beginning of a return to long-term growth in demand.”
Potash’s move sent a ripple affect through all North Americanproducers. Just after the announcement was made, shares of Agriumjumped 7.7 percent, shares of Potash One gained 3.5 percent, whileshares of Intrepid Potash surged 11.2 percent to hit $31.65. Analystsare in agreement with Potash Corp’s rosy outlook. One analyst from RBCcapital claimed, “the rebound in potash demand appears to be happeninga little more quickly than we had originally anticipated.”
Takeovers on Pause
The past year has been one of fast moves when it comes to mergersand acquisitions. The embattled potash sector encouraged many bigminers to gobble up juniors and look into expansions while prices wererock bottom. The latest development involves Agrium Inc. (TSX:AGU),who has decided to walk away from its hostile pursuit of U.S. nitrogenproducer CF Industries Holdings Inc, which enabled CF Industries tomove forward its tie up with Iowa-based Terra Industries.On Friday, CF announced a US$4.7-billion merger deal with TerraIndustries Inc, which had refused to tie up with CF since January of2009. After being courted by Norwegian company Yarra, CF sweetened itsoffer to Terra and a deal was signed.
Rumour has it that Terra was reluctant to tie up with CF becausethey felt that the company was being opportunistic by offering topurchase while share prices were at their rock bottom. By continuingto pursue, even as a rebound occurred, Terra was willing to joinforces. Meanwhile, CF said its merger with Terra will create thesecond-largest nitrogen producer in the world.
On the other hand, Agrium is not crying over spilled milk, claimingthat there are plenty of other opportunities out there and that theyoffered CF a premium. According to the CEO ,“Too many companies getcaught up in deals and overpay. We’re a very disciplined company. We’renot disappointed. We did the right thing for our shareholders.”
Moving forward, we can expect M&A activityto quiet down with many deals that we knew were in the works concluded;and the climb of potash prices and share values making deals lesseconomical.