Potash: Bull Market Continues
Friday, March 14, 2008
As markets have continued to be weak over the past few
weeks, there has been one sector which continues to stand out among the leaders:
Agriculture Stocks. Potash Corporation of Saskatchewan, The Mosaic Company, and
Agrium Incorporated have powered forward and continued their bullish uptrends.
In bear markets, equities which continue higher have serious momentum and
legitimate businesses behind them. For the past two years it has been nothing
but good news for the North American potash producers, and for the foreseeable
future it appears that this trend will continue.
Potash Corp. of Saskatchewan, the largest potash producer
in the world, has risen to the $160 level once again and still looks cheap
relative to the market using forward earnings. If you were to look at the
trailing twelve months earnings and do a price-to-earnings, the stock would look
expensive. However, when factoring in that the company is able to now sell the
potash it mines at approximately $413/tonne as well as the fact that they are to
increase capacity in 2008 by an estimated 15%.
Also helping propel the group higher is the fact that we
are now burning corn to power our vehicles. By burning our “extra” or surplus
corn the market is left in a very tight supply/demand ratio which provides
serious ammunition to the bulls. Currently we are seeing all grains headed
higher, which is obviously bullish for fertilizer stocks, especially potash
stocks as it is necessary for fertilizers and it itself is reaching a very tight
supply/demand ratio. For 2007 the market is estimated to be at about 88%
utilization, and the more acres that farmers plant next year, the higher that
utilization will go (plus do not forget that some of this utilization will also
be increased due to POT adding to their output next year from capacity not being
According to the United States Department of Agriculture,
the two crops which are the largest consumers of potash on a per acres basis are
corn and soybeans. Cotton is the third most potash intense crop, however many
predict that farmers will plant less cotton acreage in the next season as it is
labor and time intensive (much work is required to keep the plants productive
and in good shape), but in its place more corn should be substituted according
to these experts. So if the experts are correct, each acre which farmers switch
from cotton to corn would increase potash use by approximately 8.97%. Suppose
that instead of corn, those farmers instead chose to plant soybeans (a
substitute for corn and likely if crop rotation was being used as it should),
which would leave a net increase of 2.56% per acre converted. This simply looks
at the United States' production and does not factor in that farmers around the
world would have to pick up the dropped acreage of cotton because around the
world in the developing countries it is a known fact that they use far less of
the suggested, and in many cases the needed, fertilizers.
As the price
of corn increases, it becomes more attractive for farmers to plant due to higher
prices as well as the ease of growing the crop.
risen in price as well. Soybeans are a crop which can be grown instead of corn
when rotating crops and farmers are likely to grow more on excess acreage not
currently used as well if prices remain high. The higher these crops go, the
higher the price of potash can be increased.
Canpotex, the exporting arm of the major potash producing
companies of Canada (owned equally by Potash Corp. of Saskatchewan, The Mosaic
Company, and Agrium Inc.) and BPC, owned by Russian company Uralkali and
Belarus's Belaruskali control just over 60% of the world's current production,
and this number is only going to grow. These “cartels” are aggressively raising
prices and create an OPEC-like figure to “set” prices. Like iron-ore contract
prices, potash contracts are resetting at much higher prices than paid in
previous years and this should continue into the next few years as the only
company adding significant capacity will be Potash Corp. of Saskatchewan.
Although there is the risk that new mines could be opened
to fill this tight market in the future, it will take roughly 7-10 years for
these mines' production to reach market. The potash market will keep new
entrants out, for the most part, until 2011 when the first group on new entrants
are planning to open their first mines. Between 2011 and 2015, the market will
see at least six new entrants to the industry with half of those located in
Canada's prolific Saskatchewan area.
Just like many of the uranium mines located in
Saskatchewan, the grades at these mines is very high. However, to get to these
high grades the companies must sink shafts a few thousand metres beneath the
surface. The mines which use conventional underground mining techniques do run
the risk of flooding as the pressure that far beneath surface is great and
sandstone is a porous rock (a deadly mixture as noted by Cameco's Cigar Lake
Mine, which has flooded twice, and their McArthur River Mine, which flooded a
few years ago). There is one underground conventional mine, Potash's Patience
Lake, which flooded and was converted to a solution mine. If another miner were
to lose production to a flood, however unlikely, markets would react much as
they did when Silvinit announced a sinkhole threatened their only rail track
from the mine in October 2007 when potash prices increased along with dramatic
run-ups in potash mining equities.
The potash miners' stocks seem destined to continue higher
if current market trends continue in the fertilizer and agricultural markets.
Brazil, Russia, India, and China (BRICs) should help create demand for products
using potash through the evolution of their consumer markets as well as the
growth and maturing of their agriculture markets continues.
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