NEW YORK (AP) — Reports of a cheaper-than-expected contract for potash means prices are set to slide, analysts said Monday, cutting expectations for North American fertilizer companies.
Shares of major potash suppliers sank on the news.
"Potash pricing appears poised to rapidly crumble," said Oppenheimer & Co. analyst Edward Yang in a note to investors. He downgraded Intrepid Potash Inc. and Compass Minerals International Inc. to "Underperform" and "Perform," respectively, cut earnings estimates for 2009 and sees sharp profit declines in 2010. He had previously rated both "Outperform."
On Friday, fertilizer industry sources said Russian potash supplier Silvinit had struck a big deal with the major Indian potash importer, said RBC Capital Markets analyst Fai Lee in a research note Monday. Silvinit would sell India about 850,000 tonnes of potash at contract price at $460/tonne through March 2010, he said. That's $165/tonne lower than last year's contract and well below current spot prices of between $700 and $750 a tonne. He now estimates potash prices in 2010 will be $450/tonne, not $500/tonne.
The deal with India will likely set the market floor price going forward with other big potash buyers such as China, said Lee and UBS analyst Joe Dewhurst.
Dewhurts cautioned that the deal, which he heard of from fertilizer consultancies, is not confirmed and could just be a negotiating tactic, however.
Still, negotiating power over prices is now in buyers' favor, Lee said. He cut his earnings estimates on Potash Corp. of Saskatchewan Inc. and Intrepid Potash Inc. through 2010, while slashing his target price on the stock by $20 to $100 and by $7 to $29, respectively.
Sterne, Agee & Leach analyst Mark Connelly also slashed earnings estimates and target prices across the fertilizer sector, saying "the path to higher prices has gotten more difficult."
He cut his rating on Potash to "Neutral" from "Buy," and set a target price of $92.
Shares of Intrepid Potash tumbled $1.25, or 5.4 percent, to $22.23; Potash shares dropped $1.05 to $83.97; and Compass Minerals stock lost $3.82, or 7.5 percent, to $47.17. Other fertilizer companies were mixed. Mosaic Co. slid 22 cents to $40.91, while Agrium Inc. added 59 cents to $36.84 and CF Industries Holdings gained 92 cents to $70.54.