5 key indicators that drive potash stocks' outlook (Part 3 of 6)
Why inventory is important
Inventory levels reflect the current industry supply and demand balance and safety stock. When inventory levels rise, they’re often a negative sign, as the supply of fertilizers is outpacing demand. While manufacturers can adjust to the weaker demand by cutting production, they often lag. But when inventory reaches a certain level, it will usually fall as cyclical demand returns or the pace of production cuts begins to outpace falling demand.
Inventory growth slows
Potash inventory in North America grew by 11.42% year-over-year in October. This is much lower than the 18.45% seen in September, and it’s the first decline we’ve seen since it began rising in mid-2013. Analysts often use the year-over-year change to factor in seasonal purchase behavior.
Rising inventory level
Rising inventory means the supply-to-demand-balance is widening more than just seasonal factors. The breakup between Uralkali and Belaruskali froze buying activity all around the world, driving inventory growth into positive territory. As crop prices fell and harvests were delayed this year in the United States, farmers were less encouraged to purchase.
October’s lower inventory growth likely reflects a reversal of those postponed purchases. While falling prices also contributed to slack demand, as farmers took a wait-and-see approach, they might be becoming cheap enough for farmers to make purchase decisions. The recent renegotiated potash price quotes for Indian dealers might have helped, while production cuts are likely helping.
This could suggest the industry is balancing itself, which is positive because it may suggest demand is returning, given the attractive prices. However, it could also mean that fertilizer companies are cutting back on production amid weakness in demand. For now, we could say this indicator is neutral for companies like IPI, POT, AGU, and MOS and ETFs like MOO.
Browse this series on Market Realist:
- Part 1 - A guide to investing in potash companies POT, IPI, AGU, and MOS
- Part 2 - Retail potash prices keep drifting lower, to $525 per metric tonne
- Part 4 - Why China’s food inflation of 6.5% supports fertilizer demand