Prisma Investment House Ltd. sell side manager Uri Waisbrod has downgraded his recommendation for Israel Chemicals Ltd. (TASE: ICL) to "Neutral" from "Buy", citing what he describes as a "sharp downturn in demand." The investment house says that there have been signs of an increasing build-up of inventory at potash distributors in America and Europe, a surplus which will negatively impact the potash market in the short-term.
Distributors who increased inventories when prices were fairly high on the basis of the prevailing belief on the market that prices would continue to climb, are now unable to make a quick offload since farmers expect potash price to fall, and are avoiding buying large quantities. The only two countries currently propping up the potash market are India and China, to which shipments are continuing normally. (under contracts reported in 2008).
Waisbrod also notes what he said in his previous review that the fall in agricultural commodity prices cannot remain consistent with high potash prices for long - something will have to give. He adds that the fall in seed prices will have a negative effect on fertilizer stocks. Since he wrote that, seed prices have continued to fall, increasing the pressure of fertilizer prices even further. Waisbrod warns that because of the protracted fall in seed prices, the policy adopted by Potash Corp. of Saskatchewan (NYSE: POT) of keeping prices high whatever the circumstances, is doomed to failure. He expects there to be a marginal increase in contract prices for China and India on the current $625-650 per tonne.
Prisma fears that a continuation of the stagnation in the potash market could lead to substantial decrease in potash sales from the fourth quarter of 2008, harming Israel Chemical's revenue, which is why it has downgraded its recommendation for the company to "Neutral." The investment house adds that it will probably also lower its target price for the company's share after Israel Chemicals reports its third quarter results and its managers comment on the current stage of the fertilizer market.
Waisbrod feels that Israel Chemicals is currently traded below its economic value, but cautions against seeing this as an opportunity given the current uncertainty in the potash market and the negative sentiment now affecting fertilizer stocks.
Published by Globes [online], Israel business news - www.globes-online.com - on November 19, 2008
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