The UN estimates that, by 2050, the global population will have increased by 47% to 9 billion. While we don’t think often about population growth in investment analysis, this will predictably drive fertilizer consumption. And between just 2012 and 2016, fertilizer consumption will increase by 20%, according to The International Fertilizer Association. So the question then turns to how companies will get a greater share of this growing market.
Mosaic Co (NYSE:MOS)’s Beat Indicates Industry Upswing
The Mosaic Company is a Minnesota chemical company that creates crop fertilizers–phosphate and potash. In the most recent quarter, earnings from potash and phosphate fell to $2.54 billion (-16%) and $560 million (-30%), respectively. Problems in China and India resulted in lower sales of potash (a 0.3 million ton drop to 1.5 million tons). But investors were right to look at the overall picture in reacting to the news: income per share was $1.47–still much higher than the $0.88 expected by analysts.
The longer-term issue comes in China and India. To gain back these markets, Mosaic entered a deal to offer Potash for $400 per ton, $70 less than the last order from those countries. Even with these bad results Mosaic managed to increase its market share by 4.2% in just three days. This is particularly important, since, as arable land declines around the world it will become ever-important for farmers to increase yield. If Mosaic can secure greater market share now, it will pay huge dividends well into the future. But for a company with a clear early-mover advantage as a global leader in potash, let’s turn to one that bears the soil fertilizer’s name.
Potash Corp./Saskatchewan (USA) (NYSE:POT) M&A Strategy, Market Leadership Shine
As a Motley Fool contributor rightly noted some days ago, Potash is in a strong position to capitalize off of its global leadership in potash production. Its size and reputation poses a strong barrier to entry for many would-be entrants. Like Mosaic, it too has offered China a highly discounted rate for potash. This could help cut back on the potash surplus and help boost prices in the long-term as demand increases in China and India.
But where it stands out from Mosaic is in its ability to pursue more accretive takeover activity. Potash Corp (NYSE:POT) is now in talks with Israel to increase its share in the Israel Chemicals Ltd. The Israeli company is a huge employer of the Negev area, which extracts minerals from places near the Dead Sea to produce fertilizer and potash. Acquisition deals were started in October, and a decision will be made at the end of January 2013. Potash’s move to acquire the Israeli company will strengthen its lead to 25% of total yearly global production. Now that the January 22 elections are over, there is less political risk of elected officials backing a takeover. In the elections, Netanyahu’s right-leaning Likud party won seats, so a deal (or at least a compromise) is more likely to backed.