Thursday, December 11, 2008

Bloomberg: Potash (POT) to cut Production 20% in 2009; Collusion Claimed

First, an admission of guilt - I did think potash was the one commodity with a wide enough economic moat that production/price would not suffer materially in this downturn. Wrong! - well at least half wrong as prices have held up much better than any other commodity on the planet. Potash (POT) announces a 20% cutback in production... now the great irony is if this was announced 4 months ago, or 2 months ago or heck 3 weeks ago the stock would be down 30%. Instead, we get glee and jolly as Obama himself has a potash mine and hence anything Obama touches is gold. And global growth is also "back". Which once again goes to one of my favorite catch phrases - it's not the news, it's the reaction to the news. One could argue less production eventually leads to higher prices, hence this is 'bullish' but I don't read it that way - less production = less 2009 revenue all things being equal. The open question is the impact on prices in 2009 = unknown of course. CEO Bill Doyle, as have other fertilizer producers, says this disruption is "temporary" - as we said with the others, we'll see. Please note - I still like this sub-sector for the long run and indeed hold this stock, although we cut some back yesterday on the "Obama brings global growth back single handily" rally.
  • Potash Corp. of Saskatchewan Inc., the world’s largest crop-nutrient producer, said it will cut 2009 potash output by 2 million metric tons beginning in January. The reduction for the year is necessary because of “a short-term” decline in demand, Saskatoon, Saskatchewan-based Potash Corp. said today on its Web site. The company produced about 10 million tons last year.
  • Potash Corp.’s announcement comes less than a month after OAO Uralkali, Russia’s second-largest producer of the commodity, said it would cut output.
  • “Potash Corp. has long made the calculus that what it can lose on volumes it can more than make up on prices,” Raymond Goldie, an analyst at Salman Partners Inc. in Toronto, said today in a phone interview. “Potash is unique among commodities in recent months in that it has gone, or stayed, at record prices. And the folks at Potash Corp. want to ensure that.
  • Potash Corp. expects demand for the commodity will be weak through the first quarter, Chief Executive Officer Bill Doyle said in the statement. “Beyond this, we see demand accelerating through the balance of the year as farmers deplete existing stocks and work to rebuild global grain inventories from extremely low levels,” Doyle said.
  • Potash for delivery to Southeast Asia, including the cost of freight, has remained at more than $900 a ton since rising to a record in July, according to prices published by ICIS-LOR.
Now again, global grain stocks are strained, and any major weather issues can cause some serious issues worldwide. From a more practical point of view we are facing a potential disaster coming one of these years - specific to the entire commodity space we are going to ratchet down production so when the next global economic rebound happens we are going to be facing all the same situations we faced the past year. But with food, it's a lot more of a problem then say a lack of copper. [Nov 26: Food Crisis to Resume Next Year?] Resume? Did it ever leave? One billion humans now in bad shape - for some reason in our ivory tower (where 1 in 10 Americans are on food stamps) this type of news does not hit the mainstream.
  • The food crisis has pushed the number of hungry people in the world to almost 1bn, in what the United Nations’ Food and Agriculture Organisation described on Tuesday as a “serious setback” to global efforts to reduce mass starvation. The Rome-based organisation said that a preliminary estimate showed the number of undernourished people rose this year by 40m to about 963m people, after rising 75m in 2007. Before the food crisis, there were about 848m chronically hungry people in 2003-05.
I still love the agriculture space for the long run, and believe farm land will be the best 20-40 year type of investment period. Unfortunately almost every hedge fund in the world also loved this thesis so as they've been taken out and shot one by one, their puking up of said equities has exaggerated the move downward. Specific to potash, the reason we love it is the wide moat and how expensive (and long) it takes to increase production [Nov 16: Potash Expands Mine for $2 Billion]

Next, as interesting and also from Bloomberg, are claims of price fixing in potash. As consumers we hate this; but as investors - heck this was one of the main reasons we like potash producers - very few companies and we have essentially 2 mini OPECs in potash. [May 27: WSJ - Lofty Prices for Fertilizer Put Farmers in a Squeeze]
  • In southern Brazil, an almost threefold increase in fertilizer prices since January 2007 may cost Martim Mordaski Klemba his farm. The onions he’ll harvest this month don’t look so good, he said. Last month, he began using chicken dung to nourish his 13 hectares (32 acres) of soybeans. He gave up on corn. It needs nutrients “I can’t afford,” he said.
  • Uralkali and rivals such as OAO Silvinit of Solikamsk, Russia, are vowing not to cut potash prices, a stance that may help reignite the food crisis that gripped the globe this year. High nutrient costs, the credit crunch and a drop of about 50 percent in staple-food prices from record highs may prompt farmers to reduce plantings for 2009, said Remi Haquin, board president of the French national grains office.
  • Last year it was the frying pan,” Jacques Diouf, director general of the United Nations Food and Agriculture Organization, said during a conference in Rome on Oct. 15. “Next year it could be the fire.”
  • Manmade causes helped spur the food shortages that the World Bank says left 967 million of the world’s 6.7 billion people undernourished this year. The recipe for famine included government policies, speculation in commodities markets and a failure to invest in agriculture. Now the cost of potash may help bring the world a fresh bumper crop of hunger.
  • In eight federal lawsuits since September, six potash producers that do business in the U.S. have been accused of colluding to raise prices and limit supply. Four of the defendants -- Potash Corp. of Saskatchewan Inc., Mosaic Co., Agrium Inc., and Uralkali -- say the cases have no merit.
  • Farmers in Brazil, India and China had under-applied potash and depleted the soil for years by then -- further fueling demand, said Bernard Brentnall of Fertilizer & Chemical Consultancy, an advisory firm in Hampton Hill, England. Global potash production from 2005 through 2007 rose 6.1 percent, according to the U.S. Geological Survey.
  • There are no substitutes for potash,” said Stephen Jasinski, a commodity specialist at the U.S. Geological Survey, the science agency for the Interior Department, in a Nov. 24 e- mail. Alternatives don’t provide the nutrient in the quantities needed “for intensive farming,” he wrote.
  • Price jumps for potash, a source of potassium, outstripped those for nitrogen or phosphate fertilizers this year. The nutrient helps plants absorb nitrogen, use water and sunlight more efficiently and fight disease, Brentnall said. It also improves fruit and protein production. Nitrogen-based additives make plants grow faster and taller; phosphate-based products enhance root growth and stalk strength. (for all you non farming folk)
  • From August to November, the average price for potash rose 20 percent to $765 a ton, according to World Bank data. Urea, a nitrogen fertilizer, slid 68 percent to $245.75 a ton, and diammonium phosphate dropped 48 percent to $612.50 a ton.
  • Seven companies -- Uralkali, Potash Corp., Israel Chemicals, Mosaic, Silvinit, Belaruskali and K+S AG -- control 85 percent of worldwide potash production
  • The 13 members of OPEC, the Organization of Petroleum Exporting Countries, control 38 percent of global oil output, data compiled by Bloomberg show. (potash is more of an OPEC than OPEC)
  • The industry’s prices are attracting new entrants. Rio Tinto Ltd. may begin production at its $3.5 billion Potasio Rio Colorado project in Argentina in 2012. BHP Billiton Ltd. in May bought out Anglo Potash Ltd., and in June CEO Marius Kloppers said the company may invest as much as $10 billion in its potash operations. (I have long wondered why these mining majors do not buy out a Mosaic, especially at these valuations?)
  • The nutrient is recovered from mines that can be more than 1,000 meters (3,281 feet) deep. Starting a new mine takes at least $2.5 billion and as long as seven years, industry executives have said. A wholesale price of about $750 a ton is needed to justify a new site
  • Geology dictates that the bulk of production will be concentrated in a few areas, according to Brentnal. “There’s no point complaining that it’s nearly all in Russia, Belarus or Canada,” he said. “Other bits and pieces elsewhere don’t add up to a hill of beans.”
  • Importers are finding it difficult to get letters of credit for fertilizer shipments, and many farmers can’t get bank financing, said Amit Roy, president of the International Fertilizer Development Center in Muscle Shoals, Alabama. (we've talked about this same issue with dry bulk shippers)
  • Soybean harvests in Brazil, the world’s second-biggest producer, may shrink 2 percent in 2009, the first decline in five years because farmers lack credit to buy fertilizer. Brazilian corn yields may drop more than 20 percent.
  • U.S. production of corn, which requires more fertilizer than soybeans, will probably fall 8.1 percent next year to 12.02 billion bushels
  • In Pakistan, “the farmer is almost dead from these prices” for fertilizer, said Abdul Rashid Gujjar, who grows wheat on 15 acres in Taxila on the rolling plains in Punjab province, 35 kilometers (22 miles) from the markets of Islamabad and Rawalpindi. “We are barely breathing.”
  • “While some paint this as a picture of capitalism run amok, it is really a classic case study of the law of supply and demand,” Potash CEO William Doyle wrote in a June op-ed piece that the company offered as comment. “High potash prices are not the problem. In fact, the opposite is true: Low prices are behind the tight supply that we have today.”
  • The nutrient’s average price from 1990 through 2005 was $117 per ton, according to World Bank data. Global production dropped to 26.4 million tons in 2001, from 31.8 million tons of potassium equivalent in 1988, according to the U.S. Geological Survey. In 2007, it was 33 million tons of potassium equivalent.
  • In the long term, if grain prices fall, then fertilizer, including potash, has to fall too,” said Haquin, of the French national grains office. “There can be a one- or two-year scissor effect where fertilizer prices stay high even after grain prices fall, and that can kill farmers’ cash flows and make them cut plantings.”
And if that happens, we have another more potent iteration of this summer's global food crisis that was mostly ignored in the U.S. Economics 101 - who says it is not fascinating?

[Sep 11: Potash Joins Joy Global in Buyback Spree]
[Jul 24: Potash - the Beat Goes On]
[Jul 17: Canpotex to Sell Potash @ $1000/Ton]
[Apr 16: Chinese Agree to $576 Price Point for Potash]

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