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4 reasons why potash (T.POT) demand could decline in 2015

Peter Kennedy Peter Kennedy, Stockhouse Featured Writer
0 Comments| September 12, 2014

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Global potash shipments could decline by one million tonnes next year to 55.5 million tonnes, or by about 2%, writes Scotia Capital analyst Ben Isaacson in a research report.

Here are four reasons why Isaacson thinks this could happen in 2015.

1. Scotia estimates that 2014 demand includes the non-recurring restocking of about 2 million tonnes of inventory drawn down in late 2013.

2. India keeps importing under its contractual obligations, while its monsoon season is at a 5-year low. Domestic potash demand is fairly weak, and therefore, distributors are stockpiling some potash instead of selling it. This should undoubtedly lead to weaker imports next year, all else remaining equal.

3. Farmer economics have declined dramatically since the strong fertilizer application this past spring. Therefore, 2015 spring fertilizer application should be quite different in 2014.

4.Scotia thinks some distributors are forward buying (albeit, not much) head of how they see URKA’s pricing strategy playing out over the next year.

To date, Isaacson says producers have shown exceptional discipline, especially Potash Corp. (TSX: T.POT, Stock Forum), followed by Mosaic Company (NYSE: MOS, Stock Forum) and Uralkali, a Russian potash fertilizer producer and exporter.

“This is why high valuation multiples for potash earnings before interest, tax, depreciation and amortization (EBITDA) are justified,’’ he said.

However, with demand likely declining next year, and operational capability increasing by 2 million tonnes, we could see increased pressure on disciplined producers to keep prices stable in 2015.

Other companies in Scotia’s coverage universe include:

Verde Potash PLC (TSX: T.NPK, Stock Forum), which fell 2.9% to 68 cents Friday, leaving a market cap of $25.6 million, based on 37.6 million shares outstanding. The 52-week range is $2 and 19 cents.

Intrepid Potash Inc. (NYSE: IPI, Stock Forum), which rose 5.4% to $16.17, leaving a market cap of $1.2 billion, based on 76.1 million shares outstanding. The 52-week range is $17.64 and $13.51.

Agrium Inc. (TSX: T.AGU, Stock Forum), which gained 1.2% to $101.75, leaving a market cap of $14.6 billion, based on 143.7 million shares outstanding. The 52-week range is $108.28 and $84.83.

Potash Corp. (TSX: T.POT, Stock Forum) shares advanced by 2% to $37.98, leaving a market cap of $31.5 billion, based on 829.3 million shares outstanding. The 52-week range is $41.55 and $31.23.

Isaacson currently has a US$33 target for Potash Corp., which traded at US$34.30 in New York.


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