Our view: We think underlying ag fundamentals remain very strong and should continue to support elevated fertilizer prices and outsized cash generation. Export restrictions on Belarus/Russia should keep potash supply very tight for several years while high global natural gas prices keep nitrogen prices elevated. We expect Nutrien to benefit with increased potash capacity and better nitrogen ops, which supports plans for significant cash return to shareholders over the next several years.
Key points:
Ag fundamentals remain favourable, supporting strong fertilizer demand.
In market-oriented regions (i.e., US, Brazil, EU), we believe demand remains strong given favourable crop profitability, but some buyers may be holding back on purchases in the hope of lower prices while poor weather has hurt recent demand. In state-backed ag sectors (i.e., India) and locally driven markets, farmers may struggle to afford fertilizers despite a desire for higher applications. The term “demand destruction” is often used but doesn’t properly reflect current market conditions—given high global crop prices, we think demand intentions are strong, but supply shortages and high prices present different challenges across different regions. Key points to consider: lower fertilizer use likely means lower crop yields, higher crop prices, and higher fertilizer demand later; lower fertilizer use now means drawing on soil banks that will need to be replenished later; and any decline in fertilizer prices would likely see a strong demand response.
Potash remains constrained; could take several years to normalize. Our data shows no recent Belarusian offshore exports and Russia at ~30–40% of normal. We expect Russian volumes to return over time as buyers/ exporters work around sanctions and logistics challenges, but Belarus is constrained by export capacity that could take at least two years to resolve. Long-term, we see delayed expansions in Belarus/Russia, higher market concentration with Belarus selling via Russia, and some market bi- furcation with Belarus/Russia selling to lower-priced markets. While prices will likely normalize over time as Belarus/Russia return to the market, we expect them to remain elevated at $950/$750/$640/$400 per tonne Brazil potash in 2022/23/24/25 vs. $300/tonne in 2014–20. We expect Nutrien to increase potash production into this environment, producing 15Mt/16Mt/17Mt in 2022/23/24, up from 14Mt in 2021.
Outsized cash generation supports shareholder returns and debt reduction. We forecast ~$8–9B FCF generation (~15% yield) annually from 2022 through 2024, with potential upside if fertilizer prices stay higher for longer—at current spot, we estimate FCF at $12B (19% yield) in 2023. We expect management to announce further share buybacks above the current $2B commitment and pay off ~$1B debt due in the next 1–2 years.
Reiterating Outperform rating and $135 price target. We maintain our 2022E and 2023E EBITDA at $15.2B and $13.8B