Israel Chemicals faces new market reality

Efrat Peretz

Merrill Lynch: The events could create a silver lining for Israel Chemicals, if they affect the Israeli governments review of royalty rates.

The global fertilizer industry woke up on Wednesday to a new reality. The market which was built around two cartels, one Russian and the other Canadian, which dominated production and set prices for potash, overnight became more competitive, and prices are set to plummet. The announcement by Russia's Uralkali JSC (LSE: URKA) that it was quitting its cartel with Belarusian Potash Company (BPC) and cutting prices upset the applecart.

Despite Uralkali's dramatic departure, and its prediction that potash prices will fall by 25% to $300 per ton by 2014, it was business as usual in Canada, where potash producers, headed by Potash Corporation of Saskatchewan Inc. (NYSE; TSX: POT) said that they would not change their prices. Time will tell if this stubbornness will survive in the face of Uralkali's threat.

Share prices for potash producers continued to slide on Wednesday, after Tuesday's plunge by an average of 20%. Israel Chemicals Ltd. (TASE: ICL) fell another 2.7% on Wednesday on top of Tuesday's 18% drop, shedding NIS 10 billion in market cap. Uralkali fell 5.7% in London and Potash Corporation fell 8.3% on Wall Street.

Barclays Capital has slashed its target prices for potash producers, and gave "Underweight" recommendations for Russian producers, beginning with Uralkali, and "Neutral" recommendations for Canadian producers, beginning with Potash Corporation.

Barclays slashed its target price for Israel Chemicals by 23% to NIS 36, compared with Wednesday's closing price of NIS 28.48, although it reiterated its "Overweight" recommendation for the company. Analyst Joseph Wolf said that the market overreacted, and that Israel Chemicals was still profitable at $300 per ton, as was the case in 2007, and that it would still be able to distribute $750 million a year in dividends.

"The market on the day after still does not provide us with answers, there are many doubts and deep uncertainty about potash turnover, prices, and quantities that the companies would produce," Wolf told "Globes". "Everything is going to change."

Wolf is optimistic about Israel Chemicals, because it is a diversified chemicals company, rather than a pure play potash producer like its peers, which makes it more stable. He adds that Israel Chemicals sells all the potash it produces, and that it has no storage costs for what it does not sell, because it keeps potash outside at the Dead Sea because the climate permits this, in contrast to all other potash producers, which store output indoors.

Merrill Lynch cut its recommendation for Israel Chemicals to "Neutral" and slashed its target price by 19% to NIS 35. It also cut its 2014 earnings per share forecast by 23% to $0.73.

Merrill Lynch analyst Andrew Stott says that spot potash prices would be $370 per ton in Europe and Brazil, and $350 per ton in China and India. But $300 per ton could represent a potential downside to his target price of NIS 26 for Israel Chemicals.

Rethink Sheshinski II

Although Stott has not changed his assumptions about the government's take on potash sales by Israel Chemicals, he says that the events could create a silver lining for the company, if they affect the Israeli governments review of royalty rates. "We continue to model a central case scenario of a 20% royalty rate for potash (10% currently above a level of 1.5 million tons of sales). This would increase the overall tax take of the government to circa 45% (pre-dividend) from 29% currently. However, it is possible that the government seeks, in a more competitive environment for the potash industry, to establish a more lenient structure for Israel Chemicals in future royalties," he says.

Wolf told "Globes", "Sheshinksi must take into account what happened in the potash market. There is a lot of uncertainty about the facts on which the government based its royalties calculations for Israel Chemicals. The government must take into account that Israel Chemicals is affected by global events, which do not begin and end at the Dead Sea. There is no demand for three million tons of Israeli potash."

Published by Globes [online], Israel business news - - on August 1, 2013

Copyright of Globes Publisher Itonut (1983) Ltd. 2013

Efrat Peretz-Harpaz

Efrat Peretz
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