When I bought Potash of Saskatchewan (POT) for Jubak’s Picks on April 4 http://jubakpicks.com/2012/04/04/buy-potash-of-saskatchewan-pot-in-my-jubaks-picks-portfolio/ , I said I’d buy it now even though I didn’t like most cyclical stocks in the current market environment. My preference for Potash of Saskatchewan isn’t just over other cyclical stocks, however. I also prefer the stock to that of other fertilizer producers. The fundamentals for potash producers such as Potash of Saskatchewan look substantially better than those for producers of nitrogen and phosphate fertilizers.

Which is why I’m going to take the opportunity of an up market today to trim my fertilizer exposure today by selling shares of Yara International (YARIY) out of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ .

All parts of the fertilizer industry are adding capacity, which has a tendency to depress prices when demand isn’t growing like corn in Iowa in July. But the potash market is effectively controlled by the two global cartels, Canpotex of Canada and Belarussian Potash, that together account for 70% of global supply. In most years the two cartels work to match production with demand so that the potash industry avoids huge price swings and long-term gluts.

The nitrogen and phosphate markets don’t have anything like that discipline. Phosphate, which is mined as potash is, is looking at big increases in capacity from mines in the Middle East: Saudi Arabia, Iraq, Jordan, and Israel. Big additions to supply scheduled to come on line in 2012 and 2013 as countries in the region, especially Saudi Arabia, invest to build up their domestic exporting industries. In nitrogen fertilizers, where the main constraining factor is the price of natural gas, the huge global glut of gas that has led to 11 new plants, adding up to 10 million metric tons of new capacity, schedule to go into production by mid-2013. The nitrogen market is likely to be seriously oversupplied by 2013/2014, Credit Suisse concluded in an April 3 report.

Under these circumstances I’d much prefer to own potash producers such as Agrium (AGU), Mosaic (MOS), and Potash than companies over weighted to phosphate and nitrogen fertilizers.

That’s apparently a preference shared byYara International (YARIY in New York and YAR.NO in Oslo), the world’s biggest producer of nitrate (a nitrogen fertilizer) fertilizers. Read more

Companies such as Cummins (CMI) are reporting big positive earnings surprises for the third quarter—11 cents a share above consensus for Cummins—and then seeing shares get slaughtered after warning investors about weakness in the fourth quarter. (Cummins, a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ , fell 5.1% the day of its news.)

Norwegian fertilizer maker Yara International (YARIY in New York or YAR.NO in Oslo) did just the opposite. The company announced a slight miss—with EBITDA (earnings before interest, taxes, depreciation, and amortization) coming in about 2% below consensus–about 2% warning investors about a weaker fourth quarter. But then signaled a stronger fourth quarter.

Yara International’s shares are up 4.4%, as of 12:30 p.m. in New York on October 26, since the company reported earnings on October 21. (Yara International is also a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/.)

Of course, it didn’t hurt that Yara’s “bad” third quarter saw net income climb by 86% from the third quarter of 2010 (excluding currency effects and one-time items the increase was 83%.) EBITDA excluding special items grew by 66%. Not too bad no matter which way you dice it.

Yara International is riding a huge wave of rising prices for the value-added nitrate and complex nitrogen/phosphorus/potassium fertilizers that made up 60% of its sales volume in the third quarter. Read more

Buy Yara International (YARIY)

Shares of Yara International (YARIY in New York and YAR.NO in Oslo) look like they’ve finally worked through the problems that sent the stock down from a high of $60.15 on January 18 to a low of $44.38 on March 16. As I post this the shares are trading at $52.90.

The problems go back to February when the company issued a warning that fourth quarter EBITDA (earnings before interest, taxes, depreciation, and amortization) would total just NOK 3 billion (that many Norwegian Krone equals about $523 million). Analysts had been expecting something more like NOK 3.8 billion.

A bit of the shortfall was intentional: Yara said it had deferred some sales into 2011 in order to take advantage of a rising trend that promised higher fertilizer prices in 2011.

Part was a result of trends, such as higher energy costs, that were challenging companies across the sector.

But the biggest piece was a NOK 165 million write –down in quarter related to its joint venture Burrup Fertilisers as a resulted of a Yara-initiated investigation into financial irregularities at the joint venture. In 2009 Yara had posted net income from its 35% ownership of NOK 311 million. In 2010, after the write down, Yara’s net income from Burrup fell to a negative NOK 156 million.

Yara’s actual quarterly report released in February 15 was slightly worse than the February warning. EBITDA fell to NOK 2.99 billion, for instance.

And the report raised fears for 2011. Read more

Update Yara International (YARIY.PK)

Norwegian fertilizer maker Yara International (YARIY.PK), already the biggest publicly-listed fertilizer maker in the world, just bought itself a big hunk of the North American market.

In an all-cash deal Yara agreed yesterday, February 15, to buy Terra Industries (TRA) for $4.1 billion. Terra had been the object of a hostile bid from CF Industry Holdings (CF) that had valued the company at $3.88 billion.

The price certainly can’t be called cheap–Yara is paying a 24% premium to the February 12 price for Terra–and there aren’t a lot of synergies in the deal—Yara has pegged cost savings post-acquisition at just $60 million in the first year.

But buying Terra will give Yara a 30% share in the North American market. And access to cheap U.S. natural gas. With natural gas, a major fertilizer feed stock, projected to stay cheaper in the United States than in Europe for at least the next few years, the deal gives Yara a big low-cost manufacturing base. In addition using company estimates and discounting for some inefficiencies in older and smaller Terra plants, it looks like Yara is adding capacity for about 20% less than it would cost to build new plants from scratch.

 Yara management has set a goal of 10% global market share; this deal brings Yara to about 8%.

Whether the deal is good for Yara shareholders or not depends on your view of fertilizer demand. Read more

Reports of China deal send fertilizer stocks soaring

Fertilizer stocks are flying today on news, reported by Industrial Minerals http://www.mineralnet.co.uk/Article/2350062/Potash-market-flat-in-November.html , that China and Belarusian Potash are negotiating a contract for as much as 850,000 metric tons.

Such a deal would be huge for fertilizer producers and stock since even the most optimistic analysts haven’t seen China buying potash in 2009. Read more