On June 25, Potash Corp of Saskatchewan (POT) cut its 2009 second-quarter earnings guidance due to lower-than-anticipated potash sales volume and lower prices for phosphate fertilizer. The company now expects EPS of $0.70, down from its April forecast of $1.10 to $1.50.

The sales of potash – an essential crop-nutrient – is expected to be affected by a higher price on top of falling demand. Due to the ongoing credit crisis and lower grain prices, farmers have cut back on their fertilizer consumption to save on costs.

Even then, the fertilizer cartel (accounting for 75% of the global potash capacity) has deliberately cut production to keep pricing unaffected. In mid-June, Potash Corp announced to curtail its potash production by an additional 800,000 tons, bringing the total reductions in 2009 to 4.7 million tons. About 40% of the global potash production capacity has been idled since the second half of 2008.

However, fears arose that the cartel may no longer be able to sustain its price control given the current market conditions. Recently, German fertilizer producer, K+S, has opted for a simultaneous cut in production and pricing.

Farmers are now keen to know how the cartel resolves its price negotiations with the largest overseas potash buyers such as China and India. It seems very likely that they may not succeed and end up conceding to the price cut. This may be another factor behind Potash Corp’s downward revision of second quarter earnings outlook.

We continue to recommend POT as Hold with a target price of $116.50.

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