Potash (POT) Set to Sprout Higher

01/05/2010 1:30 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Just before Christmas, Belarussian Potash finally signed its long-awaited deal to sell potash fertilizer to China for $350 a metric ton (including freight). That put a floor under potash prices and gave investors the certainty they’ve been waiting for. The result was today’s (January 5, 2010) upgrade for Potash of Saskatchewan (NYSE: POT) and several other North American potash producers to “outperform” by Credit Suisse. That has sent fertilizer shares soaring today. Potash of Saskatchewan shares were up 5.7% for the day as of noon on January 5.

At $350 a metric ton, the price was lower than many had hoped—prices hit $520 a ton in 2008—but higher than the $300 a ton some had feared. The deal did indeed lead Potash of Saskatchewan to cut prices on December 28. But the signing will remove a major logjam holding up other sales. Nobody wants to buy if prices are about to head lower. China normally gets a rock bottom price because it buys so much potash and other fertilizers. India and Brazil, for example, normally pay a premium to China’s price even though they huge customers. The upshot is that after the Belarussian Potash/China deal, customers can buy with knowledge of where the floor is.

In its upgrade, Credit Suisse forecast that global potash sales would climb to 45 million metric tons in 2010. That would be a huge increase from the 25 million to 30 million tons in demand in 2009.

But the jump in demand isn’t likely to bring a big increase in potash prices. At least not immediately. The potash industry has plans to expand existing mines to add about 20 million tons of potash production capacity by 2020, Credit Suisse calculates. That should keep potash prices below the $520 per ton of 2008 until 2016, according to Credit Suisse.

As of January 5, 2010, I’m raising my target price for Potash of Saskatchewan to $130 a share by March 2010, up from the previous target of $125 a share by June 2010. For more on commodities in general for 2010, see this recent post.

Full disclosure: I own shares of Potash of Saskatchewan in my personal portfolio.

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