Intrepid Potash: An investor's guide to the American producer (Part 6 of 8)
In 2012, Intrepid Potash, Inc. (IPI) sold $451.32 million worth of fertilizers. Since September 30, 2013, sa les have decreased 20.9% to $373.45 million. Potash and Trio are the only two products that IPI is currently selling.
According to 2012 results, 90.2% of IPI’s sales came from potash and the remaining 9.8% from Trio. However, since September 30, 2013, 84.6% of IPI’s sales came from potash sales and the remaining 15.4% from Trio. Investors must keep in mind that IPI is not necessarily balancing its product portfolio but is a victim of lower potash prices as we will see in the next paragraphs.
The price of potash and Trio is what drives IPI’s sales. The price elasticity of demand for potash tends to be inelastic. This means that price changes do not affect demand. Farmers buy the amount of fertilizer they need for their crops. They do not increase consumption with cheaper prices or decrease it with higher prices. For this reason, product shipments tend to be a less important driver for sales, and so, price becomes the main driver of potash sales. Trio, on the other hand, is a specialized fertilizer whose demand tends to be significantly volatile.
From 2008 to 2012, potash revenue has increased at the rate of 17% per year. IPI has the competitive advantage of a higher potash selling price. IPI claims a 24% advantage in its latest company presentation. The reason for this is that IPI produces and sells within the U.S., one of the biggest consumers of potash. The lower transportation costs allow IPI to have higher average selling prices.
The price of potash has been decreasing over the past 2 years, directly affecting the companies’ sales. U.S. prices have been under a lot of pressure given international supply. For the last quarter of 2013, sales are expected to fall further. Some analysts expect the trend will change course in 2014, after China sets a floor price for potash; but others are still dubious about this.
Even though demand for fertilizers tends to be constant, IPI’s sales volume decreased by 37% in the third quarter of 2013 compared to the same period in 2012, decreasing sales further.
Trio, on the other hand, has experienced a 1.3% annualized revenue decrease in 2013 as compared to 2012. Even though the average selling price of trio has been increasing over the past years, volume sales have been significantly decreasing. Trio is a specialty product that could be considered as a superior good compared to potash. This means that when the price of potash falls, Trio consumers could start substitute Trio for potash. The consumption of Trio worldwide is so minute that this demand change does not affect the potash market but it does affect IPI’s sales for Trio.
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