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K+S SDF S
January 29, 2016 - 9:09pm EST by
Biffins
2016 2017
Price: 19.40 EPS 0 0
Shares Out. (in M): 191 P/E 0 0
Market Cap (in $M): 3,715 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0 0
Borrow Cost: General Collateral

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  • Commodity exposure
  • Germany
  • Fertilizer
  • potash
  • Agriculture
  • Oil
  • Oligopoly
  • Deteriorating Fundamentals
 

Description

Investment Idea

Idea: Short K+S (Ticker: SDF GR)

Thesis:

K+S is a potash producer who is facing numerous challenges to its businesses. Not only is the potash market facing structural challenges and potash prices are under duress, K+S also faces seasonal challenges to its US salt business, increased competition in the Sulphate of Potash market, and teething issues at its upcoming major investment in a new mine.

Business description:

K+S is one of the world's largest salt and fertiliser suppliers. Its primary activity is the production and distribution of potash fertilisers. It has an ageing mine life which has led to one of the highest cost of production across all producers. This has led management to invest in a new mine called “Legacy Project” due to come online shortly. K+S is also one of the world's largest salt producers, with leading positions in Europe and the Americas, the latter through the acquisition of Morton Salt.

Industry Outlook:

Potash is used as one of the main three fertilizers for the crops industry. The other two are nitrogen (in the form of urea or ammonia) and phosphates.

The Potash market operated as an oligopoly for years with two big cartels cooperating to keep prices elevated well above the global cost curve. The cartels included Canpotex and BPC. Canpotex comprised of Potash Corp of Saskatchwan, Mosaic and Agrium in North America. BPC comprised of Uralkali and Belaruskali from Russia and Belarus. K+S managed to operate outside of these much larger companies and producers and hence managed to benefit from the oligopoly by benefitting from much higher potash prices without having to withhold production capacity and operate at lower utilization level like the bigger producers in the two cartels. K+S has the highest costs of all significant producers.  Note below the major potash producers and the current cost curve.

 

From 2000-2007 potash pricing averaged approximately $165/mt before exploding upwards as the agriculture bull cycle took off and the oligopolistic effects enhanced the up-cycle. These historical datapoints emphasize that this has not always been a high priced commodity. See below for historical prices.

 

 

Potash prices stayed elevated from 2007-2013 due to the agricultural bull cycle where prices of all major agricultural commodities spiked higher and production increased. The agricultural bull cycle was linked to the oil price bull cycle due to bio-fuels. The demand for crops used in biofuel production increased dramatically from 2000 to 2014, especially between 2005 and 2010. For example, in 2000, 0.8% of the world’s oils, 2.5% of the maize, and 11% of sugar cane went for biofuels. In 2014, the shares increased to 17% for oils, 15% for maize and 23% for cane. As a result, vegetable oils and maize prices have become much more closely linked to crude oil as 15% of the world's biggest crops go into biofuels. The use of crops for biofuels production has created a link since 2007 between crude oil and crop prices. However, biofuel demand is slowing as governments are recognizing the unintended impact on food prices.

Note in the charts below the increase in the percentage of the agricultural commodity going into biofuels as well as the linkage of these biofuels with Brent crude.