Agricultural Chemicals: A Small Chink in the Fertilizer Armor? - MSCO

- Morgan Stanley notes yesterday’s declines in fertilizer shares seem to be largely due to a somewhat surprising gain in potash inventory. While the bulls would argue that this inventory build is seasonal, the firm notes that historically inventory build generally starts in August or September and not in December. If the potash market is so strong, how could inventory have risen so sharply in the month of December? Firm believes the issue may go a bit deeper and may turn out to be a bit more ominous as customers may be over-ordering in light of tight supply and rapid price increases. This would distort what producers see as “demand.” While producers continue to maintain that they are unable to keep up with orders and sales are on allocation or some degree of restriction, the inventory gain may have shown otherwise. The potash inventory gain may only be a small “hiccup” in the perfect stream of data we have been seeing, but points to a certain degree of vulnerability in the shares if the data turns less buoyant.

Firm maintains Cautious industry stance but does not have enough data to call for a sustained downturn. Maintains Underweight rating on PotashCorp (NYSE:POT) and Agrium (NYSE:AGU) and are currently Equal-weight on Mosai (NYSE:MOS).

Notablecalls: Just so you know. Not making any calls here.