Looking for Clues to Fate of Fertilizer Rally Amid Surplus

October 25, 2017 10:14 AM
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(Bloomberg) -- As fertilizer producers in North America enjoy late-season improvement in prices, investors are looking for clues from the companies this week about how much longer the gains will last.

While crop nutrients including nitrogen and potash have rebounded from recent lows, questions remain about the lingering impact of a global surplus and prospects for a slowdown in demand. Producers will begin reporting third-quarter results in the next week, starting Thursday with Potash Corp. of Saskatchewan Inc.

Potash Corp.

A rally in potash prices probably helped to boost earnings for the Saskatoon, Saskatchewan-based company to 12 cents a share in the quarter, excluding some special items, compared to 9 cents a year earlier, according to 19 estimates compiled by Bloomberg.

Potash Corp. said this month that it expects strong demand through the remainder of the year and is forecasting global shipments will be a record 62 million to 65 million metric tons. Canpotex Ltd., the joint venture that markets offshore sales for Potash Corp. and its two largest North American rivals, said it’s sold out through December because of strong demand.

Prices at export terminals in the Gulf of Mexico are up 25 percent since August 2016 to about $224 per short ton (2,000 pounds), according to fertilizer-data collector Green Markets, a unit of Bloomberg BNA.

Still, global supplies are increasing. European producers including K S AG, Eurochem Mineral & Chemical Co. and Belaruskali are adding potash capacity in 2018, and new projects are poised to begin over the next decade in Russia and Belarus, according to Bloomberg Intelligence. The potash market will have a surplus next year of 8 million to 10 million tons, and a modest rise in prices could temper demand, according to Green Markets.

Nitrogen-based fertilizers also have been rallying, including urea, which is up 56 percent to $255 a short ton since June 30, when it reached a 13-year low, according to data compiled by Green Markets. Ammonia, a chemical used to make nitrogen fertilizer, traded around $235 a short ton. While that’s up from a year earlier, prices are heading for a third straight annual decline.

Agrium, CF Industries

The gains came too late in the third quarter to be of much help to Agrium Inc. and CF Industries Holdings Inc., both of which are expected to report losses.

Calgary, Alberta-based Agrium, which reports Nov. 7, probably had a loss of 3 cents a share excluding some special items, the same as a year earlier, according to 19 analysts estimates compiled by Bloomberg.

Agrium shut parts of its nitrogen business for significant planned maintenance during the period, and the company may have sold less ammonia because of the delayed harvest in the U.S., Andrew Wong, an analyst at RBC Capital Markets in Toronto, said in an Oct. 16 note. Longer-term, the nitrogen market is still oversupplied as producers add capacity and demand continues to grow slowly, Wong said.

Still, Agrium may perform better than the consensus view because of an improving potash price and a reduction in the cost of goods sold at its nitrogen segment, Jonas Oxgaard, an analyst with Sanford C. Bernstein & Co. in New York, said in a note Wednesday.

Deerfield, Illinois-based CF, which reports Nov. 1, probably had a loss of 55 cents a share excluding items, compared with profit of 13 cents a year earlier, according to analyst estimates. On Monday, Fitch Ratings Ltd. downgraded the outlook for CF debt to negative from stable, citing an expected drop in earnings and the risk of higher leverage. The ratings agency also said ammonia prices will stay low through 2018 because of global oversupply.

While CF Industries expects firmer prices through the rest of the year, the impact may be short-lived. Two urea plants will be coming online in the U.S. next year, and then there’s already too much supply, Bernstein’s Oxgaard said. Prices could fall to $200 a short ton by the end of the year because the high cost of applying crop nutrients forces farmers in the U.S. and India to reconsider purchases, Charles Neivert, an analyst at Cowen & Co. in New York, said in a note.

Bumper harvest have kept crop prices low. While net farm income in the U.S. is forecast to rise this year for the first time since 2013 -- aided by livestock and dairy sales -- the government projects spending on seed, pesticide and fertilizer will drop 4 percent.


Mosaic Inc., a potash and phosphate producer based in Plymouth, Minnesota, probably saw earnings drop during the quarter to about 18 cents a share excluding some items, from 41 cents a year earlier, according to analyst estimates compiled by Bloomberg. The company, which reports Oct. 31, temporarily shuttered phosphate mines in central Florida last month before the arrival of Hurricane Irma. The region has the largest deposits in the U.S.

Copyright 2017 Bloomberg

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