PotashCorp shares dip on grain prices, brokerage rating

Shares of Canadian fertilizer maker PotashCorp fell roughly 2.5 per cent on Wednesday after a dip in grain prices and a bearish view from a brokerage firm.

National Bank analyst Robert Winslow initiated coverage of Saskatoon-based Potash Corp with an "underperform" rating on Wednesday, arguing that global potash supply is likely to increase more than demand, hitting prices.

"We envision global potash supply increasing more than demand through 2020, moderating medium-term potash prices and thus Potash Corp’s margin and earnings growth," he wrote in a note to clients.

PotashCorp is the world’s largest producer of its namesake nutrient and it also owns interests in a number of other global potash market players. Most of its mines are in Saskatchewan and together with Mosaic and Agrium, the companies account for roughly a third of potash exports.

Winslow, who has a US$39.50 price target on shares of PotashCorp, also said improving global grain inventory levels are likely to keep a lid on grain prices.

Strong grain prices are a key driver of fertilizer demand and a lower prices recently prompted some dealers and farmers to hold off on fertilizer orders in the hope that prices for the macro nutrients — nitrogen, phosphate and potash — would weaken.

The stronger than normal seasonal weakening in potash demand has already prompted PotashCorp to announce shutdowns at two of its facilities in Saskatchewan. The Rocanville shutdown extends from Dec. 25 to Feb. 4, while the shutdown at Lanigan begins on Jan. 8 and will extend until March 3.

Mosaic, the world’s largest producer of phosphate-based fertilizers, said last week it would cut its phosphate output, due to weakening prices.

Outlook

Growing food grain demand from emerging economies such as China, India and Brazil has put pressure on farmers to boost grain supplies and lifted demand for potash and other macro nutrients.

This has prompted PotashCorp, Mosaic and Agrium to expand the size of their operations. Within the coming decade the three companies, which market overseas potash sales through a single joint venture, will account for more than 36 million tonnes of annual potash production capacity — equal to more than 50 per cent of the world’s current production capacity.

German potash miner K+S and global mining giant BHP Billiton are also investing billions in Saskatchewan. BHP’s proposed Jansen project is expected to become the world’s largest potash mine if the Anglo-Australian mining giant pushes ahead with it.

PotashCorp’s market value soared to roughly US$55 billion early last year as grain prices and fundamentals strengthened. But its market value has dipped below US$37 billion now, as grain prices have weakened from year-ago highs.

New York-listed shares of PotashCorp were down 2.6 per cent at US$42.61 in afternoon trading on Wednesday, while its Toronto-listed shares were down 2.5 per cent at C$43.17.

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