Goldman Sachs is making an important Fertilizer call downgrading Potash Corp (NYSE:POT) to Neutral and Conviction Buy and Mosaic (NYSE:MOS) to Neutral from a Buy.
Firm notes they maintain their view that potash prices have bottomed both domestically and internationally, though it seems pricing momentum has recently stalled. They are making no changes to their estimates, and continue to see robust fertilizer demand for the sector. However, with price increases losing steam, they see fewer catalysts to propel the stocks higher near term.
In the offshore markets, the industry has secured considerable volumes with India at $370 per ton and may have to wait for Brazilian order activity this summer to establish another leg up in pricing. While they maintain that potash prices have bottomed in the international market—with the low for the current cycle set by China at $350/mt CFR—they now believe that the near-term upside to pricing may be more limited. The scale of volume in the various Indian contracts suggests less likelihood that India will be an incremental buyer of additional tons later this year. Brazil, which buys on a spot basis, could set the sentiment tone later this summer—the ag giant usually buys the bulk of its volume in 2Q and 3Q. As global producer inventories continue depleting on sales to India and other markets, the extent to which Brazil returns to more normalized application rates and restocks its channels will be a critical variable in the global market over the next several months
Goldman is also becoming concerned about pricing momentum in the domestic markets. Firm notes they have written at length on the significant rebound they expected in the North American potash market following a difficult 2009, and all indicators suggest this is playing out in early 2010. However, the expected $30 per ton spring price hike appears to be losing some industry support. Their channel checks indicate some Russian product has been pressuring the river markets and the industry may be unable to fully support the price hike. While seemingly at odds with declining producer inventories and positive expected demand, Goldman fears the visibility of stalling prices could affect recently improved buyer psychology. Furthermore, weather and planting intentions could pose a less favorable near-term risk/reward setup now that an expectation for significant volumes has become more accepted as a base case. If the spring season is too wet, or farmers tilt more towards soybeans rather than corn, potash demand could be tempered. They previously believed such risks were less significant when the market was discounting more subdued demand expectations.
Goldman is lowering their 12-month price targets for POT to $123.69 from $131 and MOS to $64 from $68 based on reduced target PE multiples of 16X from 17X to be more inline with the historical mean.
Notablecalls: There have been some rumblings over the past couple of days of Russian product being sold at lower prices, so the Goldman downgrade isn't a complete surprise.
They are backing off of their ill-timed Conviction Buy, which should pressure POT.
I see $108-107 as the prudent n-t level.
Firm notes they maintain their view that potash prices have bottomed both domestically and internationally, though it seems pricing momentum has recently stalled. They are making no changes to their estimates, and continue to see robust fertilizer demand for the sector. However, with price increases losing steam, they see fewer catalysts to propel the stocks higher near term.
In the offshore markets, the industry has secured considerable volumes with India at $370 per ton and may have to wait for Brazilian order activity this summer to establish another leg up in pricing. While they maintain that potash prices have bottomed in the international market—with the low for the current cycle set by China at $350/mt CFR—they now believe that the near-term upside to pricing may be more limited. The scale of volume in the various Indian contracts suggests less likelihood that India will be an incremental buyer of additional tons later this year. Brazil, which buys on a spot basis, could set the sentiment tone later this summer—the ag giant usually buys the bulk of its volume in 2Q and 3Q. As global producer inventories continue depleting on sales to India and other markets, the extent to which Brazil returns to more normalized application rates and restocks its channels will be a critical variable in the global market over the next several months
Goldman is also becoming concerned about pricing momentum in the domestic markets. Firm notes they have written at length on the significant rebound they expected in the North American potash market following a difficult 2009, and all indicators suggest this is playing out in early 2010. However, the expected $30 per ton spring price hike appears to be losing some industry support. Their channel checks indicate some Russian product has been pressuring the river markets and the industry may be unable to fully support the price hike. While seemingly at odds with declining producer inventories and positive expected demand, Goldman fears the visibility of stalling prices could affect recently improved buyer psychology. Furthermore, weather and planting intentions could pose a less favorable near-term risk/reward setup now that an expectation for significant volumes has become more accepted as a base case. If the spring season is too wet, or farmers tilt more towards soybeans rather than corn, potash demand could be tempered. They previously believed such risks were less significant when the market was discounting more subdued demand expectations.
Goldman is lowering their 12-month price targets for POT to $123.69 from $131 and MOS to $64 from $68 based on reduced target PE multiples of 16X from 17X to be more inline with the historical mean.
Notablecalls: There have been some rumblings over the past couple of days of Russian product being sold at lower prices, so the Goldman downgrade isn't a complete surprise.
They are backing off of their ill-timed Conviction Buy, which should pressure POT.
I see $108-107 as the prudent n-t level.
Now we are talking!
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