K+S Defies Price Gravity as Potash Shortage to Last (Update1)
By Sheenagh Matthews and Yuriy Humber
April 30 (Bloomberg) -- Two days after Barron's magazine sent shares of potash makers lower with a March 18 article predicting a sell-off, India's largest importer agreed to more than double the price it pays for the fertilizer.
In the following six weeks, K+S AG, Europe's biggest supplier of the mineral, jumped by a third. The Kassel, Germany- based company is defying attempts to call a top for the shares as a global shortage of crops used for food, animal feed and biofuels boosts selling prices and earnings. Full-year profit may triple to almost 13 euros ($20.24) a share, according to the average estimate of 16 analysts surveyed by Bloomberg.
``There's certainly upwards potential,'' said Ulle Woerner, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, Germany, who recommends buying the shares and has a price estimate of 320 euros, 22 percent above yesterday's close in Frankfurt trading. ``Price increases translate 1-to-1 into earnings.''
Even after advancing 60 percent this year, K+S may add 40 percent more in the next 12 months, according to an estimate by Gunnar Cohrs, an analyst at Berenberg Bank in Hamburg. Forecasts for competitors' shares are also optimistic as fertilizer prices soar and supplies dwindle.
K+S is ``candidate number one'' to be added to Germany's benchmark DAX index, and could be included by the end of this year, Klaus Stabel, head of research at ICF Kursmakler AG in Frankfurt said today in an interview.
Room to Rise
Potash Corp. of Saskatchewan Inc., the world's largest producer, may rise by half to $300 a share, according to Fai Lee, an RBC Capital Markets analyst in Vancouver. Russia's OAO Uralkali may add as much as 16 percent, said Mikhail Stiskin, an analyst at Troika Dialog in Moscow. Intrepid Potash Inc., the largest U.S. maker, gained more than 70 percent after its initial public offering on April 22. That pushed the price to 200 times 2007 earnings, almost the valuation of networking- equipment maker Cisco Systems Inc. at the height of the Internet stock boom in 2000.
The stock-price surge comes as global fertilizer demand is rising 5 percent a year, leaving a 1.2 million-ton potash- production shortfall. The gap may last until 2012, according to Uralkali. Fertilizers using potash, the common name for potassium chloride, improve crop yield as they help plants absorb nitrogen, use water and sunlight more efficiently and fight insects and disease.
Food Crisis
The shortage is adding to a food crisis of ``emergency proportions,'' United Nations Secretary-General Ban Ki-Moon said April 14. Grain stockpiles fell to about 53 days' worth last year, the lowest level since record-keeping began in 1960.
The price of rice, the food staple for half the world, has more than doubled in a year as China, Vietnam and Egypt curbed sales to safeguard domestic reserves. Meat consumption is rising as incomes increase in emerging markets, boosting demand for feed grains.
``An expansion of production through developing new farmland is almost impossible,'' said Carsten Kunold, a Munich-based analyst at Merck Finck & Co. who recommends buying K+S. ``Crop yields have to be boosted by other means, such as fertilization and improved seeds.''
New potash mines require seven years to start up, according to Uralkali.
The top six potash producers account for 70 percent of the 55 million-ton market, according to Uralkali's 2007 annual report, which cites the International Fertilizer Industry Association.
K+S supplies 12 percent of the market for potash and magnesium products, according to its Web site. The shares trade at 20 times estimated 2008 profit, less than the multiples of 70 for Uralkali and 43 for Potash Corp.
Setting Prices
Canpotex Ltd., a trading association owned by Potash Corp., Mosaic Co. and Agrium Inc., sold 1 million tons of the mineral to China for $576 a ton this month, more than triple last year's price. Indian Potash Ltd. paid the group $625 a ton in March. Asian clients of Uralkali's export trader will pay $1,000 a ton for potash, the company said April 23.
Producers forced China to use up a large part of its 4 million- to 5 million-ton reserve after they froze delivery in February, said Stiskin of Troika Dialog, who estimated the price at $665 including freight.
``At the next round of negotiations, at the start of 2009, China will be in an even weaker position,'' he said.
Uralkali's head of sales, Oleg Petrov, said earlier this month that the company wants to move away from long contracts in China by the end of the year and may seek to renegotiate deals every three to six months.
Short Interest
Short interest in K+S has dropped to 4 percent from 13 percent last May, according to London- and New York-based Data Explorers Ltd., indicating fewer investors are betting the shares will decline. In a short sale, an investor sells borrowed shares in an attempt to profit by buying them back later at a lower price and returning them to the owner.
Potash prices may have reached their limit, said Lars Hettche, an analyst at Bankhaus Metzler in Frankfurt.
``It's looking very much like a bubble,'' he said. ``If you see the enormous gains in the past few months, very seldom does it continue unabated.''
Prices will stabilize or fall from the $1,000-a-ton level, said Alexis Dawance, fund manager with Global-Cap SA in Zurich. ``The correction could be severe.''
