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A major supply outage at one of Uralkali’s potash mines in Russia raises the prospect of a much tighter global market for the commodity and could serve as a much-needed catalyst for Canadian fertilizer stocks.
The shutdown of the Solikamsk-2 potash mine after Uralkali detected an increased flow of brine, which can weaken a mine’s structure, bodes particularly well for producers such as Potash Corp. of Saskatchewan Inc. to increase their sales since the Russian mine has annual capacity of approximately 2.3 million tonnes.
Raymond James analyst Steve Hansen said early indications are that the shutdown will be an extended one or possibly worse, and it comes during a period of international contract negotiations, which could influence both Chinese and Indian contract pricing to the upside.
He raised his 2015 international pricing benchmarks by US$10 per tonne to reflect the additional bargaining leverage that potash marketer Canpotex, whose members include Agrium Inc., Mosaic Co. and Potash Corp., should get from this development.
“With both Uralkali and Belaruskali running close to flat out of late, we believe that much of the volume shortfall stemming from this supply outage will accrue disproportionately to the western-based producers (i.e., Canpotex) who possess ample slack capacity,” he told clients.
Mr. Hansen upgraded Potash Corp. to outperform from market perform and hiked his price target to US$40 from US$38.50, noting the company could see additional sales volumes of between 500,000 and 1.2 million tonnes if Uralkali’s production remains inhibited.
RBC Capital Markets analyst Andrew Wong believes Canpotex’s members may benefit from potentially higher prices and market share gains.
“In the near-term, we think a tighter supply and demand market may provide leverage to potash producers in their ongoing 2015 potash contract negotiations with China and India,” he said in a research note, adding that Intrepid Potash Inc. should also benefit.
Mr. Wong believes a two-to-six-month outage at Solikamsk-2 has been priced into potash stocks based on Tuesday’s stock gains. However, he sees further potential upside if the mine closes permanently.
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