Investors see upside to the possible union of Agrium and Potash
2 Sep 2016
EXCITEMENT GROWING AMID MERGER TALKS
Investors see upside to the possible union of Agrium and Potash, writes Joe Chidley.
Nothing excites investors like fertilizer, apparently.
On Tuesday, two Canadian heavyweights in the business — Calgary-based Agrium Inc. and Saskatoon-based Potash Corp. — confirmed they were in talks to get together, and investors jumped on the haywagon. Since news of this potential “merger of equals” broke, Potash shares have climbed by more than 12 per cent, Agrium’s by nearly eight.
No doubt, there’s a lot that makes sense about this deal, should it happen. Potash Corp. is the world’s largest producer of, well, potash (nutrient-form potassium), and also has its hand in nitrogen and phosphorus — the other two elements in the fertilizer triumvirate. Agrium produces its own fair share of P-N-K, too, but also manages a mega-network of North American agricultural stores.
With a merger, both companies would enjoy less competition (and the global fertilizer industry is highly competitive); Potash would diversify its revenue stream; Agrium would get enhanced production capacity. Add in the usual merger-benefit expectations — synergies, efficiencies, cost reductions, etc. — and the markets have got very excited, indeed.
And unlike the thwarted takeover of Potash by Australia’s BHP Billiton in 2010 — effectively quashed by the then-Conservative government — there’s unlikely to be a lot of regulatory concern over this deal, since Agrium and Potash are both Canadian.
For longtime investors in Potash, a little bit of share-price growth couldn’t come at a better time. The company has cut its dividend twice so far this year; its stock, which once traded above $75 back in 2008, has been mired in the low $20s all year. One useful comparison with Potash in its heyday: at current prices, the combined AgriumPotash would be valued at about $37.3 billion; back in 2010, BHP Billiton offered more than that — about US$39 billion — for Potash alone.
A lot has changed since then. At the height of last decade’s commodities boom, potash was selling for more than US$800 a ton; prices currently are in the low- to mid-$200s, down about 30 per cent from last year. India inked a potash deal with Belarusian miner Belaruskali for US$227 a ton in June; in July, China signed on at US$219 a ton.
There are a lot of reasons for this decline: slowing demand from major markets like recession-plagued Brazil and foundering China, the collapse of the fertilizer industry’s cartel in 2013, weak agricultural prices and a global oversupply of potash.
In response, fertilizer players have been cutting back on production, and many have been pointing to signs of an uptick in prices. At least part of the market’s favourable impression of a Potash-Agrium marriage, then, is a bet that prices have at long last bottomed out.
Have they? Well, it’s not at all clear.
A July analysis from Credit Suisse suggested that potash prices will fall through to 2018, amid continuing oversupply and stronger customer bargaining power. Credit Suisse figured it would take “years, not quarters” for potash prices to recover.
In short, the market’s merger mania this week might be overdone. After all, nothing really changed in the outlook for the fertilizer industry between Monday and Tuesday.
And yet there might be a longer-term play, no matter how Potash and Agrium’s merger talks turn out. The reasoning boils down to this: every year, there are more people in the world, and less land to produce food for them.
Fifty-five years ago, according to the World Bank, planet Earth offered 0.37 hectares of arable land for each of its human denizens; by 2013, every person’s plot of arable land had shrunk to 0.2 hectares — a 46 per cent decrease. In India, where population growth is high and urbanization rapid, per capita arable land declined by nearly 65 per cent over the same period.
One of the reasons we aren’t all starving by now is fertilizer, which helps farmers increase yields. Between 2002 and 2013, again according to the World Bank, global fertilizer consumption per hectare of arable land rose by 17.5 per cent. In developing countries, which have been transitioning to developed-economy agricultural practices, consumption grew even more rapidly — by 27 per cent in China, by 46 per cent in Brazil and by 57.5 per cent in India, for example.
Will this trend continue? It’s hard to see how it won’t. Not only is the global population growing at more than one per cent a year, but we’re all eating more. According to the World Health Organization, global per capita food consumption will rise to 3050 calories per day by 2030 — up 3.7 per cent from 2015 levels. In developing countries, WHO expects a 4.6 per cent increase.
The long-term equation is pretty simple: add together more people and higher per capita food consumption, then subtract usable farmland, and you come up with an intense need for yield — and higher demand for fertilizer.
That doesn’t mean either Potash or Agrium, or the two of them together, is a buy today. But if your investing horizon extends beyond the next few years, a bet on a return to fertilizer’s salad days might not be so crazy after all.