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Stock Valuation Paper
Jul 21, 2007
Introduction
This paper is focus on Potash Corp. of Saskatchewan, Inc, (PCS), one of the world’s largest fertilizer producers. Starting from snap shots of the global economic and agricultural situation, the global fertilizer industry condition, the paper calculated the intrinsic value of the company’s stock share.
Economic Analysis 1
Global Economy
According to IMF (International Monetary Fund), global economy expanded vigorously in 2006, growing by 5.4%. Global growth is expected to moderate to 4.9 percent in 2007 and 2008, some percentage point slower than in 2006.
For United States, growth is expected to come down to 2.2 percent this year, from 3.3 percent in 2006, although the economy should gather some momentum during the course of the year as the drag from the housing sector dissipates.
Emerging market and developing countries are expected to continue to grow strongly, albeit at a somewhat slower pace than in 2006. These economies will continue to draw support from benign global financial conditions and commodity prices that remain high notwithstanding recent declines. The growth rate is estimated to remain high India’s economy should also continue to grow rapidly.
According to NBSC (National Bureau of Statistics of China), Chinese GDP growth rate was 11.1% in 2006 and 11.5% in first half of 2007. China’s growth is projected to remain rapid in 2007 and 2008. (See Appendix: Figure 1: Global GDP Growth Rate)
Food & Energy
Food prices rose by 10 percent in 2006, driven mainly by surging prices of corn, wheat, and soybean oil in the second part of the year (See Figure 1 in Appendix). In some major wheat producing countries, wheat crop was poor in 2006, pushing wheat stocks to their lowest levels in 26 years. In U.S., the demand for ethanol (which uses corn as an input) and biodiesel (which uses soybean oil and other edible oils) has contributed tremendously to the surging food prices.
Looking ahead, rising demand for biofuels will likely cause the prices of corn and soybean oil to rise further, and to move more closely with the price of crude oil, as has been the case with sugar.
For 2007, the United States Department of Agriculture is estimating a record corn crop, as planting areas increase by 10 percent from 2006 at the expense of soybeans and cotton. Still, demand fueled by the increase in domestic ethanol production capacity is expected to outpace the production rise. Higher prices of corn and soybean oil will also likely push up the price of partial substitutes, such as wheat and rice, and other edible oils, and exert upward pressure on meat, dairy, and poultry prices by raising animal rearing costs, given the predominant use of corn and soymeal as feedstock, particularly in the United States (more than 95 percent).
Recent proposals to increase biofuel production in the United States and Europe will likely put additional upward pressure on corn, wheat, and edible oil prices. 2
To the fertilizer industry, the development of biofuel and the increasing food price are bullish news. That means, demand for fertilizers will remains strong or at least stable.
US plans to double the minimum mandated biofuels consumption by 2017. This would require an estimated 30 percent rise in corn production (or a corresponding reduction in exports) over the next five years to increase ethanol capacity.
The European Union adopted of a mandate to have a mini-mum of 10 percent of transport fuels replaced by biofuels by 2020. This is estimated to require about 18 percent of the total agricultural land area to be set aside for rapeseed (to be used for biodiesel production), and wheat and sugar beet (to be used in ethanol).
Industry Analysis
The products in the fertilizer industry can be grouped as nitrogen, phosphate, potash and compound fertilizers. Compound fertilizers are fertilizers that have at least two or more of the N, P, K.
According to IFA (International Fertilizer Association), the demand for nitrogen will increase in 2007. Supply for potash will remain tight this year. The capacity of phosphate is hard to increase and the sulfur based on fertilizer will be slightly surplus in 2007.
For the next four years, by 2010, IFA estimates that world fertilizer demand will grow steadily. Total demand will grow up to 171.9 million ton by 2010/2011, up 11.6% from the 2005/06, averagely 2.2% annually.
IFA forecasts that the growth of demand for potash and phosphate will be larger than that for nitrogen. Potash demand is estimated to grow by 3%; demand for phosphate is estimated to grow by 2.6%; demand for nitrogen is estimated to grow only 1.8%.
Nitrogen: global ammonia capacity is estimated to increase from 167 mmt in 2006 to 202 mmt, up 35 mmt. With a growth rate of 1.8%, the demand for nitrogen is estimated at 99.1 mmt in 2010. However, this growth rate is far less than that of capacity, which is estimated at 5.4% annually. IFA estimated that there might have more than 20 mmt surplus of urea in the world.
Phosphate: Total DAP capacity would increase 3.3 mmt (P2O5 the same hereafter)from 2006 to 2010, to 24.1 mmt in 2010.
Global phosphate ore capacity is estimated to increase by 2% annually, from the 177 mmt in 2006 to 195 mmt in 2010. The capacity of phosphate will increase by 5.4 mmt to 48.5 mmt from 2006 to 2010. By 2010, global phosphate demand is estimated to be 41.5 mmt, up 2.5% annually based on 2006 level.
Potash : IFA estimates that global potash capacity would increase from the 64.3 mmt to 71.3 mmt in 2010. The supply of potash would increase from the 27.1 mmt in 2006 to the 30.8 mmt in 2010, up 3.4% annually. Potash demand is estimated to grow 3.1% annually, from the 31.4 mmt in 2006 to the 35.2 mmt in 2010.
Due to the flood in a potash mine of JSC Uralkali, the global potash supply would be tight in short term. From 2006 to 2010, the potash surplus would reduce gradually, from 6.1 mmt to 5.2 mmt in 2009. Due to the capacity increase in Argentina and China, global surplus will increase to 6.2 mmt by 2010.
Company Analysis
Business Summary
Potash Corporation