Prisma Investment House Ltd. today initiated coverage of Israel Chemicals Ltd. (TASE: ICL) with a "Neutral" recommendation and a target price of NIS 68 per share. The share was down 0.7% in morning trading today to NIS 63.08.
Prisma analyst Uri Waisbrod predicts that potash demand in China and India, coupled with limited supply, will be the most significant factor affecting prices in the short term. He believes that prices for potash contracts in both countries will be substantially higher than in current contracts. Given the limited supply and assuming that China's potash inventory is substantially lower than needed, the price of potash could reach $1,200 per tonne. He adds the caveat that a renewed rise in grain prices is necessary to support such a price rise.
Waisbrod nevertheless believes that, in the short term, the drop in commodities prices, especially for grains, will affect share prices in the chemicals industry. "Weakening commodities prices cannot continue to be coterminous with high potash prices for long. Something must give," he says. "Although we believe that there will be positive news about the potash industry in the short term, the rise in demand (expected after 2012) completely changes the picture in the long term."
Waisbrod predicts that 2008-09 will be the best yet for Israel Chemicals thanks to the convergence of high potash prices and the company's ability to sell to more than it produces by reducing its inventory. He assumes that the company will sell 900,000 tons of potash more than it will produce in 2008-09, generating $750 million in sales.
Waisbrod emphasizes that the expiration of Israel Chemicals' current license to mine the Dead Sea in 2030 should not be ignored. "Although this is a long way off, the subject raises a major question: do we capitalize and estimate the value of the company as if its horizon is infinite, or do we consider it a company whose continuation of its activity under the current terms in 22 years is in doubt?"
Published by Globes [online], Israel business news - www.globes-online.com - on August 4, 2008
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