Potash March inventory build not a surprise; April figures
should show improvement.
The Fertilizer Institute (
) March data show sizable inventory build for potash and
significant drawdown for phosphate. Relative to historical levels,
potash inventories are well above the 5-year average while
phosphate inventories are roughly in-line.
Details: In potash, North American producer inventories
increased 274k tonnes m/m to roughly 3.3 mil tonnes and are 49%
above the 5-year avg. Potash production increased 31% m/m. In
phosphate, U.S. DAP/MAP producer inventories declined 131k tons m/m
to roughly 1 mil tons and are 1% above the 5-year avg. Phosphate
production increased 14% m/m.
Our potash view: High potash producer inventories should not
come as a surprise. Spot buying was almost non-existent until the
Chinese contracts settled in the middle of March and orders take
time to ship. We anticipate robust shipments and significant
inventory drawdown over the next couple of months. Spot sales are
brisk in Brazil and Asia, and suppliers are looking to raise prices
in Brazil to $550-560/tonne cfr starting in May. Indian shipments
have also resumed. Due to the robust sales pace, Canpotex is
projecting record quarterly sales for the April-June 2012 period.
Beyond 2Q, the outlook is admittedly less certain, and we think
volumes could weaken again given the grain price uncertainty and
With regard to phosphate, the inventory drawdown is consistent
with March spot trends. Suppliers had elected to sell on a formula
basis in key markets which enabled product to move but also put
pressure on pricing. Recently, however, prices have started to edge
higher due to strong Latin American demand and U.S. seasonal
requirements. We expect the market will focus next on upcoming
Indian contract negotiations with major suppliers. We are
forecasting PhosChem to settle at $525-550/t cfr over the next 1-2
months. Over the past week, PhosAgro reportedly signed an agreement
with India but only secured volumes (600k tonnes DAP/NPKs + 400kt
option); DAP prices are to be determined pending the PhosChem
Maintain Outperform. Despite what is an unclear 2H outlook given
grain price uncertainty and distributor caution, we maintain our
Outperform ratings on MOS and POT due to strong industry discipline
and the relative price stability in the potash market as well as
the companies' long-term growth prospects tied to their brownfield
expansions. Valuations are attractive, with MOS shares currently
trading at 6.5X EV/EBITDA vs. their historical 9X, and POT shares
at 7.6X EV/EBITDA vs. their historical 10X.
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