The $20-billion potash market has been under a dark cloud since last July.
That’s when the world’s largest potash producer Uralkali ADR (URAYY) left the Belarusian Potash Corporation potash export cartel.
The breakup sent potash prices tumbling down 30% to about $300 per ton in December 2013, a six-year low.
It also sent both large and small potash stocks into a tailspin.
This year, weakening crop prices have started to pressure the potash industry, too. (Potash has historically moved in line with crop prices.)
However, the sun is beginning to shine in the form of improving fundamentals. Yet the stocks are still dirt cheap, offering contrarian investors a real opportunity to reap profits.
That Ol’ Supply-Demand Story
Since last December’s low, rising potash prices have signaled a change in the potash market.
In September, Uralkali made a potash sale to Brazil, an agricultural powerhouse, at a price of $380 per ton. Brazil is using a record amount of fertilizer on its crops this year.
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It seems the rise in price is due mainly to greater demand.
Uralkali had previously estimated global potash demand this year to be between 56- and 58-million metric tons (mts). But now, it’s predicting that demand will be around 60 million mts.
Part of that increased demand is coming from commodities-hungry Asia.
China is expected to consume 12 million mts of potash this year. Previous estimates put consumption at only 11 million.
Potash imports into India also increased by two million mts this year.
This increase in demand is occurring against a backdrop of somewhat tighter supplies. North American inventories of potash in June, for instance, were 18% below the five-year average.
Two Forward-Looking Buys
The real test of a long-term rise in potash prices will come in early 2015 when China negotiates its annual potash contract with Uralkali (15% of which is owned by China’s sovereign investment fund).
Analysts believe the aforementioned sale to Brazil and current potash prices in North America and Europe, which are between $355 and $405 per ton, are a sure sign of higher-priced deal.
Expectations are that the two parties will agree on a 10% hike in the current $305-per-ton rate.
Add this to the fact that lower crop prices have likely been factored into the already-beaten-down potash stocks, and you have the setup for a nice contrarian play.
Investors should consider the out-of-favor Canpotex cartel members Potash and Mosaic.
Potash recently traded at an eight-month low, and Mosaic recently dealt at a price not seen in more than a year.
These two potash giants offer investors good value at current prices. Not to mention the potential for a strong rebound in the share price thanks to higher potash prices.
And “the chase” continues,