These are stories Report on Business is following Tuesday, July 30, 2013.
Potash sector in turmoil
North America’s potash cartel has lost its pricing heft with the collapse of its Russian counterpart today, leading to a bloodbath in shares of potash-related producers.
Shares of Potash Corp. of Saskatchewan and The Mosaic Co. plunged by about 16 per cent and 17.7 per cent, respectively, while Agrium Inc. slipped 5 per cent, The Globe and Mail's Bertrand Marotte reports.
Their marketing arm, Canpotex, took something of a hit with the break-up of Belarus Potash Co., the exporting group of Russian producer Uralkali and its partner in BPC, Belaruskali, throwing the industry into turmoil.
So much so that analyst Joel Jackson of BMO Nesbitt Burns. called it "the end of the potash world as we know it."
Uralkali complained that its counterpart had been operating outside of their agreement, and thus it is quitting the group. Analysts now expect potash prices to plunge to the $300 (U.S.) a tonne range, from their current $400.
“Discipline and price-over-volume leadership in the potash industry seem to have crumbled, and we expect a major exit by investors out of potash producers … and the fertilizer sector in general following a stunning announcement by large Russian low-cost potash producer Uralkali to change its strategy to volume-over-price and to market by itself,” he said in a research note.
“Our analysis is preliminary, but our initial bear case is that global price estimates could fall by $100 a tonne (down closer to marginal European costs,” which will impact all producers, though companies such as [Potash Corp. and Urakali] have the most spare capacity to partially offset lower prices and might relatively fare the ‘least worse.’”
Canpotex and BPC often moved in tandem where prices were concerned, said Cantor Fitzgerald analyst Peter Prattas. When one struck a major pricing agreement, the other would follow, he said.
Now, Canpotex has “lost the key advantage” without that rival in place because it “puts that pricing discipline at risk,” Mr. Prattas said in an interview.
Bank of Nova Scotia’s Patricia Mohr, one of Canada’s leading commodities analysts, agreed the collapse of the Russian cartel likely will mean lower prices in the short term, but she questions whether Uralkali will need to cut them to the $300 range.
“There has recently been concern that potash demand worldwide has not grown as rapidly as desired by the industry or the investment community and it appears that Uralkali wants to lower prices to boost demand,” Ms. Mohr said.
“The recent appreciation of the U.S. dollar – particularly against the Indian rupee – has made it difficult to boost prices.”
Indeed, just last week Potash Corp. cut its forecast for profit this year, to a range of $2.45 a share to $2.70, down from its April projection of $2.75 to $3.25.
Analyst Jacob Bout of CIBC World Markets questioned whether Uralkali really wants to end the cartel.
“Breaking apart the ‘oligopoly’ is the worst-case scenario for the potash industry (and we know that URKA has a flare for dramatic),” Mr. Bout said.
“Likely this announcement is a ploy by URKA to force Belaruskali (the other part of BPC) to a settlement under URKA’s terms,” he added.
“When the potash industry is in a 15-per-cent to 20-per-cent oversupply situation, it doesn’t make a lot of sense to break up the ‘oligopoly’ for a few more tonnes of market share.”
There’s a broader economic impact here, as well, given the importance of potash in Canada.
“We had already factored in the near-term impacts of the stall that had developed in contracting activity in the sector, and its implications for [third-quarter] activity,” said chief economy Avery Shenfeld of CIBC World Markets.
“To give a sense of scale, potash production is a bit under a half pe rcent of Canadian GDP, and represents about 1.5 per cent of Canadian goods exports,” Mr. Shenfeld said today.
“A drop of 25 per cent in volumes in Q3 (not unreasonable, and it could in fact be 30-40 per cent), associated with production being curtailed as buyers sit and wait for lower prices, would therefore entail a drop of about 0.1 per cent in real GDP, or roughly 0.4 per cent at annual rates. Our sector analyst expects volumes (not prices) to rebound in Q4 as the lower prices will bring the buyers out to complete contracts.”
Canadian potash exports have averaged almost $459-million (Canadian) a month over the past 12 months, BMO Nesbitt Burns notes, with sales to China, India and Malaysia up by more than 40 per cent in the first five months of this year.
Sales to Canada’s biggest markets, the United States and Brazil, also rose sharply, said BMO economist Christy Chen, and, but for the latest developments, overall exports could well have topped their peak of two years ago.
In a research note, Mr. Prattas slashed his earnings estimates and price target on Potash Corp., Canada’s major producer, in the wake of the Uralkali decision, cutting his outlook on Potash shares to $36 from $46.
He also cut his estimates on earnings per share to $2.37 this year from $2.53, and to $2.67 next year from his earlier forecast of $3.06.
That’s based on potash prices of $333 a tonne this year and $316 next, compared to $424 in 2012.
“Shares will likely remain volatile until pricing bottoms and/or the duopoly is somehow restored,” Mr. Prattas said.
BMO's Mr. Jackson also projected a hit to the North American industry.
“We believe potash earnings estimates will move materially lower, but industry multiples will likely lower too as investors question why potash producers still deserve historical premium multiples over diversified miners,” he said.
A spokesman for Potash Corp. told The Canadian Press the Saskatchewan company is still studying what happened, while an Agrium spokesman pointed out to Bloomberg that “this is not the first time that Russian producers have had disagreements.”
Mosaic’s chief financial officer also questioned the events, according to Reuters: “It seems there’s a feud underway between Uralkali and Belaruskali and the rest of the industry’s caught up. We’re still trying to sort out what Uralkali intends to do, which may be different from what it says it will do.”
- Russia pulls out of cartel, potash prices expected to plunge
- Economy Lab: Potash hit could cut Suskatchewan economic growth in half, economists say
- Scott Barlow in ROB Insight (for subscribers): Potash investors should have seen crash coming
- Potash Corp. slashes profit outlook
TD takes insurance hit
After being slammed by catastrophic weather events, and foreseeing trouble ahead in automotive, the insurance arm of Toronto-Dominion Bank expects a third-quarter net loss of between $240-million and $290-million after tax, The Globe and Mail's Jacqueline Nelson reports.
The loss stems from a $418-million after-tax hit “from a combination of severe weather-related impact and increased general insurance claims,” the bank said in a statement. TD has the largest property and casualty insurance operations of all of Canada’s Big Banks.
The evacuation, home and automobile damage claims resulting from the storms in both Alberta and Toronto this summer accounts or many of those claims. These events will cost TD Insurance $125-million after tax and reinsurance (which insurers buy to protect themselves and manage risk).
The insurer also noted it would mark down an after-tax hit of $93-million because of loan losses in its real estate secured lending portfolio related to the Alberta storms
JPMorgan settles probe
JPMorgan Chase & Co. is paying $410-million (U.S.) to settle allegations of manipulating electricity markets in California and the U.S. Midwest.
Details of the settlement by a unit of the big bank, JP Morgan Ventures Energy Corp., were announced today by the Federal Energy Regulatory Commission.
Regulators said the company is paying a civil penalty of $285-million and disgorging a further $125-million in “unjust profits,” which will go to ratepayers in the areas.
The company agreed to the facts, the FERC said, but did not admit or deny the allegations of manipulation from September 2010 to November 2012.
How the Bank of England began
The Bank of England today provides a fascinating look at its roots, the days when everyone from knights and “spinsters” to ironmongers and “gentlemen” held its stock.
The storied institution, now the realm of former Bank of Canada governor Mark Carney, was formed in 1694, with the aim of raising £1.2-million to finance the French wars. The shares were held privately until 1946.
According to the Bank of England, some 1,520 people took part in the initial subscription, with amounts from £25 to the £10,000 of King William and Queen Mary.
The list is a history lesson in the times. “Gentleman” Mordecai Abbott, for example, went in for £1,000, while mathematician James Atkinson took £100, “malster” Joseph Aunger £1,000, and “widow” Emma Baker £500. Two women who appear to be “spinster” sisters, Frances and Grace Barnham, took £100 each.
Then there’s “skinner” Richard Atkinson, at £200, “girdler” Marmaduke Bludder, Renea Chambrelan, whose claim to fame is that she was “sister of Joseph Chambrelan,” “wharfinger” John Clapham, and John Dennett, a “citizen and fishmonger of London.”
The central bank also published minutes of the meetings of the Court of Directors, who met then to discuss administrative issues. These meetings continue today.
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