Psagot Investment House Ltd. today reiterated its "Outperform" recommendation for Israel Chemicals Ltd. (TASE: ICL) with a target price of NIS 41, a 26% premium on today's opening price, despite price cuts by competitors for new potash deliveries.
JSC Belarusian Potash Company (BPC), the exporter of potash fertilizers produced by RUE PA Belaruskali and JSC Uralkali (LSE; RTS:URKA), yesterday cut the price of potash for Brazilian customers, for the first time since 2006. The price of potash delivered in March-May was cut by $250 per ton to $750 in an effort to revive demand.
Psagot analyst Limor Gruber says, "We believe that the price cut indicates the substantial fraying of the discipline that characterized the potash market in recent months." She adds that potash producers had hitherto insisted that price cuts would not boost demand, and that keeping prices high would enable them to retain the value of inventory when demand returns to normal.
Gruber added, "We've heard about fears in the industry that the fact that Russian producers were under government pressure (the fine imposed on Uralkali by the Russian authorities for flooding the market in 2006) and that they were financially weaker than potash producers in other countries was liable to cause them to break ranks. These fears have now been realized."
Gruber believes that other potash producers will be forced to lower prices as well. "Although the price in Brazil is still higher than our estimate for potash prices for the year, the question remains: Will the price cut help boost demand?" She says no. Instead, the price cut is liable to snowball into an avalanche of price cuts whose size and scale cannot be estimated at this time.
The price cuts by BPC and Uralkali are even more surprising, given the ongoing negotiations with China, which, as of yesterday, had not asked for a price cut in the 2009 delivery contracts. Gruber says, "So long as these negotiations are underway, the price cut for the Brazilian deliveries is liable to whet the appetite of the Chinese." This could definitely have an adverse effect on the global potash industry.
Israel Chemicals' share fell 3.5% on the TASE by mid-afternoon to NIS 32.
Published by Globes [online], Israel business news - www.globes-online.com - on March 5, 2009
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