Phosphate fertilizer makers are set to gain as a supply surplus in the $35 billion market narrows, reducing the premium investors pay for potash producers, according to VTB Capital.
“The phosphate fertilizer producers are set to become the blue chips of the agrochemicals market, the role which potash miners once held,” said Elena Sakhnova, an analyst at VTB Capital in Moscow. While the two groups of fertilizers don’t directly compete as farmers require both, Sakhnova said the pendulum is swinging in favor of phosphates, with demand set to increase 3 percent this year. The $20 billion potash market hasn’t recovered from the 2013 demise of the trading venture between PAO Uralkali, the biggest producer, and its Belarusian partner, which depressed crop nutrient prices and shares.
The gap in the enterprise value to earnings before interest, taxes, depreciation and amortization ratio between potash producers and phosphate-focused fertilizer makers, which indicates the size of the premium investors are ready to pay for the shares, has narrowed to the lowest since at least 2013, according to data compiled by Bloomberg.
“The supply-demand situation on the horizon is much better in phosphates than in other fertilizers,” said investor Jim Rogers, who prefers to invest in OAO Phosagro, the world’s thir- largest phosphate nutrients producer, than Uralkali. Demand for diammonium and monoammonium phosphate, the benchmark for the nutrient, is set to increase to 62 million metric tons this year, according to VTB Capital estimates.
“The demand growth of the phosphates market will be higher than the speed new projects will be developed,” Sakhnova said. That will see the industry running at 87 percent of total capacity in a decade compared with 78 percent in 2014, she said.
Phosphate demand in India, which slumped by half in 2013, has rebounded with purchases projected to grow by as much as 60 percent this year, according to Phosagro and Mosaic Co. By contrast, Uralkali sees potash demand declining by 6 percent to 8 percent this year from the record 63 million tons in 2014. With new projects, including Eurochem Group AG’s fields in Russia and BHP Billiton Ltd.’s Jansen, looming, that may cut capacity utilization at potash producers to an average 78 percent in a decade from 85 percent last year, said Sakhnova, the most accurate share price forecaster for Uralkali, according to data tracked by Bloomberg.
“Most investors, in my opinion, have valued potash producers for their historical management of supply when prices fell,” said Jason Miner, an analyst at Bloomberg Intelligence. “The rapid rise of potential capacity, and growth in number of suppliers negotiating, has weakened that view.”