Analyst Actions: Credit Suisse Keeps Outperform on Mosaic and Potash Corp


Potash March inventory build not a surprise; April figures should show improvement.

The Fertilizer Institute ( TFI ) 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 distributor caution.

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 agreement.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright (C) 2014 All rights reserved. Unauthorized reproduction is strictly prohibited.

This article appears in: Investing , Commodities

Referenced Stocks: TFI

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