From Barron's Investors Soapbox A.M:
Credit Suisse
We believe that Uralkali's recent announcement to move to a volume-over-price strategy will eventually lead to a full breakdown of industry discipline and consequently further pricing pressure in the second half and into 2014.
As a result we are downgrading Potash Corp. of Saskatchewan (ticker: POT) to Underperform (from Outperform) with an updated target price of $27 [down from $43]. We are also downgrading Intrepid Potash (IPI) to Underperform (from Neutral) with an updated target price of $11 [down from $20].
We maintain a Neutral rating on Mosaic (MOS), but are reducing our target price to $41 (from $65).
In our view current excess capacity in the market (excluding greenfields) is enough to incentivize others to follow [Russian fertilizer firm] Uralkali's lead to target volume growth at the expense of pricing discipline. Despite significant negative price action Tuesday, we believe there remains incremental downside as volume improvements and significant reductions in the average cost per metric ton are unlikely to offset lower pricing and will likely lead to valuation compression.
We believe Uralkali's strategic move to target volumes and subsequently leave [cartel] Belarusian Potash Corp. (BPC) was only a matter of time (albeit clearly unexpected in the near term), with recent market-share losses in Latin America and lack of pricing discipline on [partner] Belaruskali's end acting as the boiling point. At the risk of losing market share (even in a growing market) we believe Canpotex producers [ Agrium (AGU), Mosaic and Potash Corp.] will have no choice but to gradually follow suit and drop price in order to defend their respective growth outlooks, particularly with additional capacity coming online during the next two years, approximately.
In the near term we expect volumes to likely freeze, with pricing gradually falling in the second half and into 2014. Once the dust settles, we expect a Chinese contract at about $300 per metric ton level (for 2014), with spot pricing in Brazil/Southeast Asia dropping to about $350 per metric ton for large customers. We also note there is a risk to the North American pricing spread versus international due to increases in domestic import pricing pressures (deriving from Uralkali).
-- Christopher S. Parkinson
-- Thomas Ackerman
