This is a top-down analysis. Oil price keeps going up. We also have a food crisis. We have less land for crops. We have converted and diverted a lot of plantation towards biofuels. There is one sub-sector that possibly can "gain" from the above developments. Fertilisers, to be specific. In particular, those that promotes high-yield in crops. Owing to rising prices in soft commodities, governments, enterprises and farmers collectively will use better fertiliser, and more of that even to push up production yield.
Asia Times (22 Apr 2008) - The magnitude and growth rate of demand from China still drives global commodity prices. But in the fertilizer sector, where China this month has had to agree to a price for potash more than double what it paid last year, the inflexibility of Chinese demand for food has made it difficult for the country's negotiators to hang on to the commercial advantages they are accustomed to enjoying from being the world's largest consumer. In an announcement on April 17, it was revealed that Chinese importers of potash have agreed on a price of about US$650 per tonne, delivered from Russia by sea. This is higher than the Indian benchmark price of $625 agreed just weeks ago. It is US$400 per tonne above the price of the expiring Chinese contract, signed a year ago. The term of the new pricing deal is just eight months. The volume of deliveries for this period will be just 1 million tonnes, half of the 2007 contract volume oiver a 12-month period. The global trade in potash is even more concentrated than OPEC for oil, with just two syndicates dominant: Sinagpore-based Canpotex, which manages sales of the three North American majors (Potash Corporation, Mosaic, and Agrium), and Minsk-based BPC, a joint venture combining Uralkali and Belaruskali.
In 2006, Uralkali’s share price ranged between $2 and $2.50, with a market capitalization of about $3 billion. In October 2007, when it was listed on the London Stock Exchange for the first time, the share price was $3.35; market cap about $5 billion. Last Friday, Uralkali’s share price was $9.25, market cap $19.7 billion. On Wednesday, it had climbed to $11, market cap $23.4 billion. In a year, the company has increased its value more than fourfold. Compared with the big Canadians, it has still plenty of upside value to catch up: Potash Corporation is currently capitalized at $58 billion; Mosaic at $57 billion.
Sinofert (Reuters 0297.HK; Bloomberg 297; HK 0297) Principally engaged in the production, import, export, distribution, wholesale and retail of fertilizer raw materials and products, as well as research and development and services in the field of fertilizer-related business and products. Potash Fertilizers: China lacks potash resources, and the production of potash is limited, with 70% of potash demand relies on import. In 2006, the annual potash contract negotiations were not concluded until late July, and as a result, the import of sea-borne potash fertilizers to China was suspended for the first eight months of the year. During this period, the Group made full utilization of the strategic potash inventories to stabilize market supply, and on the other hand increased the business volume of domestic potash and maintained the cutting edge of the Group in the potash business. Despite the negative effect of 1.27 million ton less of imported potash sales due to the prolonged potash contract negotiations, the returns remained basically the same as 2005. Total sales volume was 4.56 million ton, accounting approximately 45% of Chinaˇs potash consumption, and the leading position of the Group in the Chinese potash market was further consolidated.
Nitrogen Fertilizers: Chinaˇs nitrogen production capacity is more than adequate, and nitrogen supply exceeds demand. With the implementation of supply-chain management, the Group has continuously expanded the domestic nitrogen supply channel through strategically investing in nitrogen manufacturers with competitive strengths and signing long-term contracts with core suppliers. In addition, by taking the advantages of the distribution network and financial resources, the Group carried out off-season stocking programs by sourcing nitrogen fertilizers while the prices were at low points. This has enabled the rapid expansion of nitrogen sales and improved profitability. In 2006 the Group realized nitrogen sales of 3.71 million ton, increasing by 105% over the same period of last year. This figure accounts for approximately 8% of Chinaˇs total nitrogen.
12 month high-low HK8.60-4.02) To breach the HK8.60 high, the stock will only trade at 24x 08 earnings.(Reference Price: HK$5.90)
China XLX Fertiliser (Bloomberg CXLX.SP; CXLX.SI Exchange) Back in March 2008 the stock was trading at SG56 cents, yesterday it was at SG96 cents despite the difficult market environment since March 2008. Its 12 month high-low was SG$1.43-0.56, gee March was the low for the stock, should have posted on this a month or two earlier! Despite the 9% jump in coal prices in the last quarter, it is still operating at a very comfortable 25% gross profit margin. Another 10% jump in coal price will only shave 2 percentage points from the gross profit margin. (Reference Price: SGD0.96)
I expect both companies to retest their 12 month high some time this year. As explained in the previous posting, both stocks will be looking forward to a major upcoming catalyst: China government revising the ceiling price upwards to better reflect international price pressures.
p/s photo: Maria Ozawa
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