Potash cartel cracks leading to rout in fertilizer stocks

07/30/2013 2:44 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

The danger was clearly implied in Potash of Saskatchewan’s (POT) July 25 earnings results.

Potash volumes were up, the company reported, but prices were down—and the implication was that pricing discipline among the seven companies that control the global potash fertilizer market was under stress.

That discipline has now cracked. Totally.

Today OAO Uralkali, the world’s largest potash producer, announced that it would end limits on production that have kept potash fertilizer prices from collapsing. The company also said it would end cooperation with Belarus that controlled potash supplies from the countries that once made up the Soviet Union.

The result has been a rout for potash fertilizer shares. Potash of Saskatchewan is down 18.7% as of 2 p.m. New York time. Mosaic (MOS) has tumbled 18.4%.

The worst-case scenario, as articulated by Mosaic today, is that OAO Uralkali’s increased production will undermine prices in global markets that the cartel was struggling to push up to near $400 a metric ton AND lead to increased imports into Mosaic and Potash’s core North American markets.

In my post yesterday on Potash of Saskatchewan http://jubakpicks.com/2013/07/29/stock-pick-potash-volumes-up-but-earnings-down-so-still-too-early-to-buy/ I said that I’d like to see some signs that potash pricing had turned up before buying the shares and that investors might see such evidence in the fourth quarter. I think that advice is even more appropriate today since now we don’t know how much production OAO Uralkali will push onto the market or whether other producers will follow suit. A key question is whether other cartel members will retain some production and pricing discipline or whether everyone will decide to produce as much as they can. For example, Potash of Saskatchewan has idled a lot of production to support prices. Will the company keep that capacity on the sidelines?

I think we might have some answers on production levels by the end of the third quarter. I would be extremely reluctant to buy in the sector before I had some more information on that.

Potash of Saskatchewan is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com// .

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Potash of Saskatchewan as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.
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