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National Bank analyst Robert Winslow initiated coverage of Saskatoon, Saskatchewan-based Potash Corp with an 'underperform' rating on Wednesday, arguing that global potash supply is likely to increase more than demand, hitting prices.
"We envision global potash supply increasing more than demand through 2020, moderating medium-term potash prices and thus Potash Corp's margin and earnings growth," he wrote in a note to clients.
Potash Corp is the world's largest producer of its namesake nutrient and it also owns interests in a number of other global potash market players. Most of its mines are in the western Canadian province of Saskatchewan and together with Mosaic Co (MOS.N) and Agrium Inc (AGU.TO), the companies account for roughly a third of potash exports.
Winslow, who has a $39.50 price target on shares of Potash Corp, also said improving global grain inventory levels are likely to keep a lid on grain prices.
Strong grain prices are a key driver of fertilizer demand and a lower prices recently prompted some dealers and farmers to hold off on fertilizer orders in the hope that prices for the macro nutrients - nitrogen, phosphate and potash - would weaken.
The stronger than normal seasonal weakening in potash demand has already prompted Potash Corp to announce shutdowns at two of its facilities in Saskatchewan. The Rocanville shutdown extends from December 25 to February 4, while the shutdown at Lanigan begins on January 8 and will extend until March 3.
Mosaic, the world's largest producer of phosphate-based fertilizers, said last week it would cut its phosphate output, due to weakening prices.
Potash - the common name for widely used crop nutrient potassium chloride - is only mined in a handful of countries. Canada, Belarus and Russia account for the vast majority of the world's production and exports.
Growing food grain demand from emerging economies like China, India and Brazil has put pressure on farmers to boost grain supplies and lifted demand for potash and other macro nutrients.
This has prompted Potash Corp, Mosaic and Agrium to expand the size of their operations. Within the coming decade the three companies, which market overseas potash sales through a single joint venture, will account for more than 36 million tonnes of annual potash production capacity - equal to more than 50 percent of the world's current production capacity.
German potash miner K+S (SDFGn.DE) and global mining giant BHP Billiton (BHP.AX) (BLT.L) are also investing billions in Saskatchewan. BHP's proposed Jansen project is expected to become the world's largest potash mine if the Anglo-Australian mining giant pushes ahead with it.
In 2010, BHP attempted to acquire Potash Corp for $39 billion, a hostile offer that was blocked by the Canadian government.
Potash Corp's market value soared to roughly $55 billion early last year as grain prices and fundamentals strengthened. But its market value has dipped below $37 billion now, as grain prices have weakened from year ago highs.
New York-listed shares of Potash Corp were down 2.6 percent at $42.61 in afternoon trading on Wednesday, while its Toronto-listed shares were down 2.5 percent at C$43.17.
Editing by Janet Guttsman