After suffering a major lashing in late July, one of the world’s most vital commodities – potash – could’ve just become a bargain hunter’s dream.
Potash, for those who don’t know, is a vital agricultural nutrient used to make fertilizer. It’s estimated that without potash to help grow crops, 33% of the world would experience a severe food shortage.
Now normally, news about this commodity doesn’t make the headlines…
But on July 30, 2013, something happened in the industry that had global implications.
In a move that practically crippled the market, the world’s largest potash supplier, Russia’s Uralkali, announced that it would quit the Belarusian Potash Co (BPC) – a partnership/cartel with Belarus’ state-owned Belaruskali.
BPC was primarily created to stamp out competition and to keep potash prices high by limiting output. Prior to the fallout, the cartel controlled 43% of the world’s exports of the commodity and sold potash to more than 80 countries worldwide.
But Uralkali called an end to the cooperation, claiming Belarus had undermined the partnership by allowing Belaruskali to export potash independently of BPC.
The move effectively ended the global pricing scheme, which immediately triggered a collapse in potash company stock prices around the world.
You see, Uralkali now plans on undercutting the competition and gaining market share by flooding the market with cheap potash.
The Russian company, with the lowest production costs among international peers, will run at full capacity next year, boosting output to 13 million tons in 2014 from 10.5 million tons this year.
This influx of new supply means that potash prices could drop 25% to $300/ton by the end of the year – a price that’s too low for many producers.
According to the Financial Post, Uralkali shares fell 18% to 152.75 rubles in Moscow, their lowest intraday level since November 2010. Israel Chemicals Ltd. fell 17% to 29.39 shekels in Tel Aviv, the biggest intraday drop in almost five years. And K+S shares dropped 25% to 19.97 euros in Germany.
As you can see, companies are getting beaten down hard. And in response, Belarus has begun struck back.
Late last month, Uralkali CEO Vladislav Baumgertner was arrested in Belarus and was charged with abusing his position as chairman of BPC.
If found guilty, Baumgertner could face 10 years behind bars.
Then just this week, Belarus President Alexander Lukashenko signed a decree forming a brand new Belarusian Potash Co. that will be fully under the control of the government and will market only Belarus potash.
The outcome of this saga is still up in the air. However, with a commodity in free fall and companies set to write down billions of dollars in asset values – this could be an excellent time for investors to begin looking for beaten up potash stocks on the cheap.
Best Stock to Buy:
Canada-based Potash Corp. (NYSE:POT) had a really solid first half of the year as they reported earnings of $1.37 per share ($1.2 billion) compared with $1.16 a year earlier.
Cash flow from its operating activities reached a record $1.9 billion in the first six months.
But between July 29th and July 30th, Potash was one of the hardest hit companies – sinking nearly 24% to $29.00.
So why should investors take notice of it?
Because POT is not a pure-play potash company. It also produces nitrogen and phosphate for use in fertilizers, feed and other industrial uses. Together, the two products are expected to generate roughly half the company’s gross margin.
Although potash prices are now expected to fall and the company will likely need to revise its guidance, these other business arms should be more than capable of keeping it afloat.
What’s more, the company authorized a US$2 billion share repurchase program in late July that will reduce the number of shares outstanding by about 5%. A share buyback is often an indication that management thinks its stock is undervalued.
In addition, the company pays a quarterly dividend, which in May, rose 25% percent to $0.35 per share.
Now I’m not saying you should rush out and immediately load up on shares as quickly as possible…
But be aware that POT is just one of many potential targets investors should have on their radar in the weeks and months ahead.
I anticipate a very volatile market in the near term.
However, as long as the world needs to continue feeding an ever-growing population, we may see a long-term rebound in potash that could be spectacular.