Investors eyeing The Mosaic Company and Potash Corp of Saskatchewan because their stocks look cheap after plummeting about 40 percent from their 2013 highs should reconsider and avoid these value traps at all costs.
At the height of the agricultural super-cycle, the time needed to bring new potash mines onstream prevented productive capacity from keeping pace with demand growth.
But expansion projects authorized during the boom years will contribute to a 24 percent increase in the industry’s nameplate production capacity over the next five years. These new mines will depress utilization rates to less than 70 percent in coming years, compared with 90 percent in 2006 and 2007.
To worsen matters, the break-up of the Belarusian Potash Co. in 2013 shattered the long-standing duopoly that had dominated the industry and helped to maintain discipline on the supply side.
Potash Corp of Saskatchewan has sought to recapture some pricing power through industry consolidation; the Canadian outfit recently announced a takeover bid for Germany-based K+S (Frankfurt: SDF, OTC: KPLUY), a deal that has already encountered pushback from regulators. Many worry that Potash Corp of Saskatchewan will overpay for K+S to overcome this resistance.
Smart investors will avoid The Mosaic Company and Potash Corp of Saskatchewan—there’s more pain to come in this segment of the fertilizer industry.