PotashCorp Thinks China's New Potash Contract Signals a Bottom
The contract signed by China may finally provide some certainty for the potash market, and could even be a sign that the bottom has been reached. Image source: Getty Images.
China finally signed a contract for potash delivery this year with Belarusian state-producer Belaruskai, but at $219 per metric ton, the price is 30% below last year's and is one that's not been seen in nearly a decade. But it could've been a lot worse, and PotashCorp (NYSE: POT) even sees this as a sign that that market has reached a bottom.
Historically low prices
Since the 2013 breakup of the Belarusian Potash Company, a cartel comprised of Belaruskali and Russian producer Uralkali, pricing has been in freefall. Potash that sold for about $400 per metric ton before the cartel's collapse tumbled to $315 per metric ton immediately afterwards,and with China delaying signing a contract this year, analysts speculated pricing might even fall to around $200 per metric ton.
Although there was some hope when Belaruskali recently signed a contract with India for $227 per metric ton, all eyes remained on China because, as the world's biggest importer of potash, it tends to command the best prices.Thus the announcement last week it signed one with Belaruskali for $219 per metric ton came as a relief, even if the agreed on price was historically low. Many felt it could have been worse.
Potash producers have reported receiving dramatically lower prices on a global basis. PotashCorp, for example, had said its average realized price was just $178 per metric ton in the first quarter, 37% below the $284 it had realized a year ago. Both Mosaic (NYSE: MOS) and Agrium (NYSE: AGU), PotashCorp's partners in Canpotex, the North American marketing organizationfor potash, also reported lower average selling prices of $207 and $199 per metric ton, respectively.
Expecting a price turnaround
Although the potash market is still in oversupply, PotashCorp believes there's a good chance this year's contract is actually the bottom. At a recent fertilizer industry conference, the crop nutrient producer laid out a bullish case for potash pricing to rise next year.
Image source: PotashCorp Southwestern Fertilizer Conference presentation.
It noted that over the past decade and a half, there have been a handful of times when China has delayed signing a contract, or even didn't sign one at all (during the depths of the Great Recession). But when that happened, the following year demand tended to increase and the industry saw prices rise. PotashCorp believes that situation will run true to form next year as the delayed contract sets up "the potential for a strong demand recovery in the coming year."
Perhaps, but miners have been digging in for a protracted pricing slump. Mosaic just announced it was putting its Colonsay mine in Saskatchewan into care-and-maintenance mode and laying off 330 workers. That follows PotashCorp's decision earlier this year to similarly suspend operations at its Picadilly mine in New Brunswick, Canada, followed by Intrepid Potash(NYSE: IPI) announcing in May it was idling its Carlsbad, New Mexico, facility. And Canpotex itself said it had cut by 8% potash exports over the first half of 2016.
In commodities markets, just as in investing, past performance is no indication of future results. As events in the potash industry during the Great Recession -- and even between 2014 and 2015, when pricing remained flat -- prove, there's no guarantee prices will rise next year. Investors need to see whether production cuts ease the supply glut and if lower pricing boosts demand.
There do appear signs the worst is over, and with even Belaruskali and Uralkali possibly reuniting their cartel, this might be the time for investors to look at the sector again. With shares of both Mosaic and PotashCorp having lost about a third of their value over the past year, they might be just as good a place to startas any.
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Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.