Among the reasons
that many investors prefer potash to other minerals and commodities is that it
tends to be less volatile - in terms of both prices and volumes. In many cases, that's true. The potash industry, however, remains a lumpy
business. The soft results of the third
quarter - EPS was $0.74, down from $0.94 in the year-ago quarter - are a result
of demand lumpiness from both China and India.
Prices have remained quite firm, though, at $429 per tonne, in line with
the second quarter, though down about 5% from a year ago.
In China, demand
for seaborne potash has been weak in recent months, as the country meets in
near-term needs by drawing down domestic inventories, as well as increasing
purchases of more locally sourced production.
The Chinese are very shrewd negotiators, and some of their recent
behavior is motivated by the desire to purchase fertilizer at lower
prices. Ultimately, however, Chinese
demand for potash increases every year, and short-term tactics to gain negotiating
leverage do not change the long-term supply-and-demand equation, which favors
suppliers. Potash Corp management -
along with the other members of Canpotex - has elected to counter reduced
demand with reduced supply, and pledged to continue doing so into next year,
despite the ever-growing gulf between the company’s capacity and its actual
production.
India poses a
different and trickier problem. Indian
fertilizer buyers depend on heavy government subsidies. The subsidy regime, though, has been
reorganized in the past year, and now favors outlays on nitrogen-based
products, at the cost of potash. But
Indian crops face a widening fertilizer imbalance, where the proportion of
potash as a percentage of overall fertilizer inputs is far below the
scientifically recommended number. In
consequence, India's yields are far below those enjoyed elsewhere in the
world. Over time, this problem will be
corrected, but given the political element to it, how and when any remedial
action plays out is unclear.
Happily for
shareholders, potash demand is robust in virtually all areas outside of China
and India, particularly in North America and Brazil. Given that the two countries have a combined
2.5 billion mouths to feed, and relatively high food inflation, it’s only a
matter of time before agreements are signed and potash shipments resume.
As Potash Corp
moves closer to completing its large, long-running capex program, the company
will begin to generate substantial amounts of free cash flow, especially
compared to today's stock price.
Management recently approved a significant increase of the dividend, to
$0.21 per quarter, a 2.1% dividend yield at the current share price. Though significant, a dividend payout at that
level leaves ample room for further dividend increases, share repurchases and
acquisitions (management reaffirmed their long-term intention to take control
of one or more of the companies that Potash Corp owns common stock positions
in).
My original write-up on Potash Corp is here.
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