Merrill Lynch reports that Israel Chemicals Ltd. (TASE: CHIM) has signed two contracts for the sale of 20,000 tons of fertilizer to Vietnam at a record price of $385-400 per ton. “These record prices increase our confidence that the potash price projections in our model are too conservative and could mark a new industry benchmark.”
The investment bank adds, “Israel Chemicals is the only company that theoretically has extra volumes to supply the market, as during 2006 when the market was ‘on hold’ company piled up two million tons of potash at the Dead Sea Works. This extra tonnage will be delivered to the market within 18-24 months (due to bottlenecking in the ports). Likewise, we do not believe that Israel Chemicals will break the market discipline. However, those two million tons under the current pricing environment (factoring in a “blue sky” scenario) have a potential to translate to a 22% increase in our 2008-2009 EBITDA forecasts.
Merrill Lynch notes the halt in deliveries by Russian potash companies JCS Uralkali and JCS Silvinit, which “could reduce global potash supply by 8%.” It adds, “Both PCS and Uralkali announced that none of the Canpotex or the BPC members will move to fill the void and take new clients outside of their organizations.” The bank says that this clear message has two effects: stronger market discipline, an easing of cyclicality, and better visibility; and that it will put pressure on China, which accounts for 11% of global potash demand. “We note that China pays approx. $130/ton (with transportation) lower than spot. We also believe that other markets will move in advance and settle supply contracts with higher prices. We believe that Israel Chemical’s Vietnamese contracts were the first sign for that.”
Merrill Lynch warns of a downside to the rising potash prices. “Farmers’ cash margins are at all time high but nothing good will come out of it to the plant protection universe. Higher expenditure on fertilizers can lead to pressure on the fragmented industries like plant protection, especially as the fertilizers suppliers have such a grip on the market.” This could put pressure on Makhteshim Agan Industries Ltd. (TASE: MAIN).
Published by Globes [online], Israel business news - www.globes.co.il - on October 29, 2007
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