Why POT so quickly comes off the boil

After a more than 3% jump in the first half hour following stellar financial results, investors quickly tempered their optimism about the prospects of the world’s largest potash miner.

By midday Potash Corp of Saskatchewan had drifted into negative territory while its peers rallied along with the broader market. Earlier Scotia Capital said next year will bring zero price growth for the crop nutrient currently trading at roughly $500/tonne.

The industry has been here before: farmers in India, China and Brazil drove potash from $100/tonne in 2004 to almost $900/tonne in the run up to the 2008 recession when the boom went bust and prices rapidly fell back to $350/tonne.

MINING.com reported mid-September disproportionate price increases of fertilizers are playing out in India, with sales of muriate of potash (MOP) plunging 58% during the kharif (monsoon) planting season due to high import prices compounded by a strong rupee.

Prices will also come under pressure as world potash production soars in the coming years with Russia’s Uralkali, world number 2 producer, announcing this week it is spending $5.8 billion to boost capacity by 80% over the next decade. Ethiopia, once synonymous with famine, has attracted $6.5 billion worth of potash investments from among other BHP Billiton and Canada’s Allan Potash according to statement from the country’s mines minister released last week.

On top of changing market conditions $38 billion Potash Corp has also come under fire in its home province. Saskatchewan is in the midst of an election campaign and proposals are on the table to tax an extra five cents of every dollar of potash sales.

Farmers in Potash Corp’s prime market in the US have been dealing with massive increases in land lease rates and property prices which should mean that the demand for potash increases as upping yields per acre becomes and important way to reduce costs.

The price of corn, the US’s largest crop, has now also showed three weeks of gains after plunging in September, but so far Potash Corp investors aren’t buying into this theory of Potash Corp as a contrarian investment. POT is down 10.4% over the last three months, double the rate of decline of the broader market.

The Financial Post reports despite the cloudy outlook for the sector Scotia still likes Potash Corp. and sees a 12-month price target of US$71, which translates to a 43.3% return from US$49.55 it was trading at on Thursday.

Click here for more on the company’s results.