Potash Corporation of Saskatchewan (POT)

China is the largest consumer of potash in the world, accounting for approximately 27 percent of global demand. As growth slows in China as the effects of stimulus packages wear off and efforts to stave off increasing property prices take effect, demand from potash's largest consumer will fall.

There are conflicting views on future pricing:

At the end of May 2008, inventories were about one million tonnes, roughly half a May five-year average of approximately two million tonnes.

Yet there are some who would suggest there is a surplus of potash, including a U.N. fertilizer report which reported there is an estimated 64 million tonnes of nameplate potash capacity globally, but only 54 million tonnes of annual demand. This document predicts supply to outstrip demand by at least sixmillion tonnes annually through 2012. Nameplate capacity may represent a theoretical capacity, which could be difficult or impossible to consistently produce.

$1000 Pricing

Another Bank just raised its fertilizer price forecasts given the recent run-up in nitrogen and the “increasing likelihood” of a US$1,000 potash price in Q4. It is for this reason that many existing and prospective producers are looking to invest billions in developing new potash projects.

But despite posting superb profits that handily beat earnings estimates and raising outlook, the stock sold off, together with the rest of the sector. That’s partly because commodity prices have dropped back, causing related stocks to do the same. The stock-price decline, in the case of Potash, also has a company-specific negative component: Workers are threatening to strike at three mines that account for roughly 30% of Potash’s output. Without question, a strike could negatively affect Potash’s output – even as it raises the price of potash globally, helping the company’s rivals in the near-term.

However, the afore-mentioned sell-off in commodities has been driven by several important factors:

• Short-term momentum players and some institutional investors have moved away from the so-called “ethanol trade,” since electoral uncertainties raise probability that next year’s ethanol subsidies might be reduced or scrapped altogether. This worry also has affected Archer Daniels Midland Co. (ADM), a prime beneficiary.
• The U.S. dollar has been climbing against both the Japanese yen and the European euro, especially now that Europe has started to slow, a victim of its appreciated currency tight monetary policy. Some emerging economies also tightened their monetary policies to curb inflation. In this environment, commodities as hedge for inflation have lost some appeal, at least for the moment.
• This slowdown and demand destruction, in part because of higher prices, have also induced oil prices to decline, and that, in turn, has helped reduce overall inflationary pressures – reducing the need for investors to hedge energy with grains and other agricultural commodities.
• Summer in the United States has not seen extreme temperatures nor hurricanes, so this year’s crop has only been mildly affected by floods, unlike last year’s weather-induced crop losses. Benevolent weather has also helped lower the price of oil.

The share price may be artificially inflated as Potash become the most valuable company in Toronto Exchange.

Huge capacity expansions are planned by existing players which are expected to increase supply from 2012. Also, new players such as Rio Tinto and BHP Billton have shown interest in entering the field. These new entrants along with there valuable cash experience and deep cash pockets can develop newer plants thus making the market over supplied.

Also, India and China purchase potash through a single agency which enables them to wield a lot of bargaining power. This was visible prior to 2005 which forced the potash producers to form cartels. Though this vantage point has lessened in recent times, they still have strength to resist further price increases

Russia is a major player in potash supply and the government can use it to lure emerging economies towards its side against its ongoing conflict with the west