Potash Oversupply Makes Investments Uncertain In Short-Term, Morgan Stanley Says

Morgan Stanley’s Vincent Andrews said that potash is expected to be oversupplied in the near to medium term. Although prices seem to have bottomed for the US spring season, they are likely to become increasingly seasonal in nature, much like nitrogen and phosphate.

“New capacity from both K+S (late 2016) and Eurochem (2017) poses further risk to prices unless delayed new production, demand growth, and producer discipline allows for a reprieve,” analyst Vincent Andrews wrote.

Mosaic

Andrews downgraded the rating for Mosaic Co MOS from Overweight to Equal-weight, while reducing the price target from $42 to $29.

Although profits generated by Mosaic's phosphate assets are likely to continue to improve, with lower cost ammonia flowing through the P&L and low-cost volume ramping up at Ma'aden II, this already seems to be “well understood,” the analyst wrote.

The valuation premium of potash nutrient to phosphate has significantly contracted. Moreover, Mosaic's cash flow from operations has declined, while there has been no reduction in the company’s capex or investment needs. This adversely impacted what was earlier considered “substantial opportunities for incremental return of capital,” the Morgan Stanley report said.

“Net, while Mosaic may still outperform its direct fertilizer peers, we no longer expect it to outperform the broader chemicals industry,” Andrews commented.

Potash Corporation

The analyst resumed coverage of Potash Corporation of Saskatchewan (USA) POT with an Equal-weight rating and a price target of $19.

Andrews believes that there is unlikely to be any meaningful recovery in potash profits, and the market would continue to be concerned about the company’s dividend payout ratio of nearly 100 percent, [versus Mosaic's 70 percent].

“Further, while Potash Corp. has substantial volume growth potential, we expect the significant capacity growth coming from both K+S and Eurochem to absorb the lion's share of global demand growth,” the report stated.