Prisma Goes Contrarian On Potash Industry

One of Israel’s largest asset management firms, Prisma Investment House, is out with a report on global fertilizer leader, Israel Chemicals (see below). Speaking about the the future of potash pricing, Prisma takes a contrarian view. While analysts are busy raising estimates for stocks like Potash (POT) and Mosaic (MOS), on the heels of continuing strong demand and rising Potash prices, Prisma encourages investors to take a step back, and re-evaluate what the future holds.

“Whilst we estimate that the near future will provide positive headlines for the potash sector, the increase in supply (predicted for 2012 and beyond) presents a completely different long term perspective. In our opinion the increase in the global output will lead to a sharp decrease in the price, while the entry of new participants into the club of potash producers will only accelerate the process. We remind you that in recent weeks the arrival of two companies (EuroChem, Rio Tinto (RTP)) into the potash industry has been announced.”

I think that’s really interesting. You rarely hear about the new producers entering the market. Over at Seeking Alpha, Ron Haruni talks about how Rio Tinto is going to try and grab 10% of the world potash market. This may have a material impact on Potash and Mosaic, as well as Israel Chemicals. That being said the near term looks more promising for the industry. Both China and India will need to renew potash contracts at the end of the year. Their current contracts are for prices well under the current market price. This may cause another run up in prices, and that price hike has the potential to be very good for Potash, Mosaic and Israel Chemicals, as the new producers that I mentioned earlier, won’t make a big impact over the next few months.

For investors in these companies, this could potentially provide a bounce, as all these stocks have dropped around 20% over the last month or so. If you are thinking about investing in one of the fertilizing companies, have a look at the Prisma report.

Read this document on Scribd: ICL - 7-08 - Initial - ENG 4

Disclosure: Author’s fund has no position in any stock mentioned as of 8/04/08.

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