Is Your Favorite Stock About to Fizzle? – Potash Corp./Saskatchewan (USA) (POT), Mosaic Co (MOS), Agrium Inc. (USA) (AGU)

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One industry that grabbed eyeballs as 2013 kicked off was fertilizers. Companies dealing in potash were at the forefront as deals flew in from two of the most important markets for the nutrient. The contracts that the cartel Canpotex, which includes Potash Corp./Saskatchewan (USA) (NYSE:POT), Mosaic Co (NYSE:MOS), and Agrium Inc. (USA) (NYSE:AGU), bagged from China and India early this year is kind of old news by now. But its repercussions still aren't.

Most are pegging it to be a good year for potash players as these deals perk up sales volumes. But what about prices? If Potash Corp./Saskatchewan (USA) (NYSE:POT) prices fail to look up, the euphoria might be short lived.

Losing ground?

Potash prices have been on a downward spiral since the second half of 2011, hitting the top lines of all the companies thriving on the nutrient hard, including Intrepid Potash, Inc. (NYSE:IPI).

POT Revenue Quarterly YoY Growth data by YCharts

Each of these companies realized lower selling prices in their last quarters. I have pulled out the average selling price data for the companies for their third and fourth quarters for both 2012 and 2011 to give you an idea. The first table reflects prices in North America while the second shows offshore realized prices. Look closely, and you’ll realize where the real problem is – it’s the offshore markets where the price drop was steeper in the last quarter.

North America
Company Q4 2012 Q32012 Q4 2011 Q3 2011
Potash 447 466 514 533
Mosaic Co (NYSE:MOS) 472 479 433 520
Agrium Inc. (USA) (NYSE:AGU) 491 564 581 597
Intrepid Potash 479 489 548 539

Prices in $ per metric tonne

Offshore markets
Company Q4 2012 Q32012 Q4 2011 Q3 2011
Potash 339 398 401 406
Mosaic 352 404 393 400
Agrium 326 333 386 401

Prices in $ per metric tonne (Note: Agrium reports per tonne basis. 1 metric tonne= 2205 pounds and 1 tonne=2240 pounds)

Both Potash Corp./Saskatchewan (USA) (NYSE:POT) and Mosaic Co (NYSE:MOS) reported sharp falls in offshore selling prices in their last quarters. Intrepid Potash is not a part of Table 2 because it sells almost the entire produce in domestic markets. Of these, Agrium Inc. (USA) (NYSE:AGU) is least affected because as much as 80% of its business comes from nitrogen. But you can see how painful global markets have been.

Where’s it headed?

The recent Canpotex deals should improve situations. Both China and India waited for several quarters to let potash prices ease before signing fresh deals. The latest contract with China entails supply of 1 million tonnes of potash averaging $400 per tonne through June 2013. With India, it’s 1.1 million tonnes at $427 per tonne through January 2014. As these prices are a decent upside to what potash companies sold at last quarter, they could well act as a support. So the downside appears limited here.

Prices in the U.S. should also find support in the upcoming spring season. Here’s some quick January data to give you an idea of what’s going on in the North American potash market:

Production was 5% lower sequentially and 18% lower year-on-year, while inventory declined 1% sequentially.

Domestic sales climbed 3% sequentially and a significant 67% year-on-year.

Potash exports inched 13% and 38% higher sequentially and year-on-year, respectively.

In short, demand is strong ahead of the U.S. spring planting season. At the same time, companies aren’t working at full capacity. This should balance out demand and supply better, thereby supporting potash prices.

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