The fourth quarter was an awful one for fertilizer producers, as demand got deferred and the equities continued to trade far below their historical multiples.
But things are looking up, according to BMO Capital Markets analyst Joel Jackson. He wrote that the demand deferral going on in the industry cannot last forever, especially given that market sentiment in the agriculture sector is starting to pick up. That is particularly true in the corn business, as the South American crop is dealing with moisture weakness issues.
“The perception of tight corn stocks in 2012 relaxing to a more balanced dynamic in 2013 is being challenged,” Mr. Jackson wrote in a note.
That is promising news for the fertilizer sector. Price momentum in the potash business has vanished of late, pushing producers to cut output. And urea (nitrogen) prices had what Mr. Jackson called a “violent crash” in Q4, falling from about US$510 per short tonne in September to as low as US$350.
As fertilizer demand re-emerges in a more bullish environment for agriculture, Mr. Jackson expects the entire sector to rebound. He upgraded shares of Agrium Inc., CF Industries Holdings Inc., and Israel Chemicals Ltd. to outperform from market perform, while maintaining an outperform rating on shares of Potash Corp. of Saskatchewan Inc.
“For Canadian large-cap investors, we recommend a balanced mix of [Potash Corp.] and [Agrium] to more broadly benefit from a bullish ag sentiment,” he wrote.
He is less bullish on phosphate, noting that major production cuts have been announced for the first quarter, and that more may be necessary unless “widespread” demand re-emerges.
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