Potash prices likely to remain elevated
It has been a rough couple of weeks for the potash industry. First, European potash company K+S AG reduced its prices, a major no-no as far as its rivals are concerned. Then, the mighty Potash Corp. of Saskatchewan Inc. made a massive cut to its earnings outlook that had to be embarrassing.
But here is some good news, courtesy of analyst Fai Lee at RBC Capital Markets: potash fundamentals are still excellent in the short term and long term, and should remain above historical levels.
In the short term, Mr. Lee wrote that producers have done an excellent job of curtailing production to meet falling demand, with over 14 million tonnes of output expected to be cut this year. He also suggested that the next fiscal year should be a fairly profitable one for most U.S. farmers, which gives them more incentive to buy fertilizer and maximize crop yields. And one other factor is that the decline in fertilizer applications during the 2008-2009 fertilizer year could actually hurt soil fertility levels.
"In sustainable agriculture, potassium removed from crops will eventually have to be replaced or crop yields will be negatively impacted," he wrote in a note to clients.
For the longer term, Mr. Lee pointed to high barriers to entry in the potash sector, a balanced supply-demand outlook, and the ongoing need to feed a growing population as reasons to be optimistic about pricing. He noted that the global population is growing at a rate of 2.5 people per second, or by about 79 million people a year. And of course, much of that growth is in key potash markets like China, India and Brazil.
"In the major agricultural regions of China, India and Brazil, potash application rates are significantly below scientifically-recommended levels and improved fertilizer practices could lead to higher yields," he wrote.