While investors have been obsessed with when demand for potash will rebound, another key crop nutrient has quietly pushed into the spotlight as tight supplies ratchet up prices.
Phosphate is starting to command more investor attention as production outages have limited supplies of the crop nutrient and dragged down inventories. Though the crunch might not last long, phosphate-based fertilizer prices have surged – while potash pricing has languished.
Some investors are now betting that phosphate producers such as Mosaic Co. and CF Industries will reap rewards in the coming weeks as fertilizer sales increase.
“I think in the short term phosphate pricing is going to continue to move higher,” said Atlantic Equities analyst Colin Isaac. “We are just coming into the period of maximum demand.”
Both potash and phosphate are essential to crop production and, as the world’s population has grown and the amount of arable land has barely budged, the need to boost yields has fuelled a big interest in the fertilizer sector.
The prices of phosphate and potash fertilizers more than quadrupled a few years ago as grain prices rose and fertilizer demand skyrocketed. Prices peaked in mid-2008, but have fallen sharply since then as the credit crisis and recession hurt grain prices and, subsequently, fertilizer demand.
Phosphate prices bottomed out in 2009 and have risen more than 50 per cent since November. In contrast, potash prices could fall further before starting to rise again.
Prices for diammonium phosphate (DAP), a key phosphate derivative and fertilizer, are about US$435 a tonne now, up from a low of $260 a year ago. Some analysts see prices breaching the $500 mark as the spring planting season approaches in North America.
Furthermore, North American potash inventories at the producer level are currently 45 per cent above the previous five-year average. By contrast, DAP inventories are 45 per cent below average, according to the most recent data.
That bodes well for companies that mine and produce large quantities of phosphate, like Mosaic Co.
Potash Corp., the second-largest phosphate producer in North America, also stands to benefit. But being the world’s largest potash producer, the company is viewed as being more of a potash play and investors seldom pay enough attention to its phosphate business.
While Potash Corp. shares are up about 20 per cent since November, Mosaic’s shares have risen almost 30 per cent over the same period.
Similarly, CF Industries, whose phosphate operations account for about a third of its annual revenues, stands to benefit more than pure potash play Intrepid Potash.
“Phosphate volumes have returned to near-normal levels on strong global demand as distributors and retailers replenish depleted inventories because, unlike potash, the market has not been impacted by price uncertainty,” said Broadpoint AmTech analyst Edlain Rodriguez in a note to clients.
Plans by mining giant Vale to acquire U. S. grain trader Bunge’s sizable fertilizer assets in Brazil further illustrate a growing interest in phosphate. Vale is in talks to buy Bunge’s 42.3 per cent stake in Fosfertil, along with key phosphate mines and manufacturing plants.
Phosphorus, which is found in phosphate, is used by the human body to build and repair cell walls. It is typically considered the second-most important nutrient – after nitrogen – that farmers need to apply to crops.
Most phosphate deposits are found near the surface, making them much easier to process than potash, which typically is buried deep underground.
World supply of phosphate is tight right now due in part to mine production problems in Morocco, which holds vast supplies of the nutrient.
The tight supply situation could ease toward the end of 2010, as producers restore production and China lifts its seasonal tariffs on DAP exports, once again dragging DAP pricing back to $300-to $350-a-tonne levels.
However, in the short term investors with exposure to phosphate producers are poised to benefit.
“Although we see phosphate prices easing once the season ends, we believe that the recent tightness in the phosphate market may induce some customers to take some inventory risk,” said Dahlman Rose & Co. analyst Charles Neivert.