The growing probability that China will devalue its currency may be the biggest risk to fertilizer stocks, Scotiabank says inside a new report.
A devaluation of the yuan is potentially “devastating,” said analyst Ben Issacson, because global nitrogen prices would instantly plunge, with ammonia following in sympathy.
“Potash demand destruction would be swift as Chinese farmers pushed back on soaring local prices necessary to cover unchanged U.S. dollar prices,” he told clients inside a report, adding the phosphate market could be spared as lower-cost Chinese capacity wouldn’t have the ability to push non-integrated India producers off the cost curve.
“Of course, commodities worldwide would suffer greatly,” Mr. Issacson said, noting that Agrium Inc. and Mosaic Co. will be the better picks in his coverage universe if your devaluation occurs, but they would still suffer “first-degree burns.”
Most investors may bet against China devaluing the yuan, but the analyst thinks the probability of it happening is much greater than simply a “tail risk” as a result of what he labels a “near-empty monetary toolbox” for the world’s second-largest economy.
“Even if we don’t see a shock towards the yuan, a gradual depreciation might have similar impact – the forward curve suggests this really is already underway,” Mr. Issacson said.