Friday, July 24, 2009
Potash & Propane, What's Going On?
It is 6:00 AM sharp and a Friday cup of Joe is always welcome. We've had quite a rally this week but things should settle down a bit today, the ole Colonel believes the summer to be a sideways move from here on. Let's build a good foundation to these markets before we start raising the roof.
The Report has a mining focus but we shouldn't forget that there is a strong agriculture segment to our local economy and other things such as the cost of energy affect our pocketbooks. Some readers are no doubt are less concerned with the price of molybdenum than the price of fertilizer and the bill to heat their home in the winter. For a change of pace let's talk about the latter two; I'll pick potash and propane.
Potash, nitrogen and phosphate, are the three main macro nutrients used by farmers across the globe. Yesterday, Potash Corp of Saskatchewan (POT), the world's largest fertilizer maker, announced a drop of almost 80 percent in its second-quarter profit on Thursday, hurt by lower sales volumes and weaker pricing, and it also cut its full year financial forecast. Last year POT was one of the hottest stocks around with a high of $214 last June crashing to a low of $47 in the darkest days of March. Yesterday it rallied off their grim report to $95.78 which is not unusual. Investors know the world must continue to eat even in hard times and POT will certainly have a brighter future as the global recovery gets its legs. Hopefully, farmers will benefit with lower fertilizer costs in the meantime. If POT falls back to $89, the Colonel is a buyer (no, not that pot!).
Last April the Report looked at the propane futures data to try and figure out if lower propane prices were in store for Eurekans (Lower Propane Bills and More Gold in China). Natural gas has been one of the worst performers this year enjoying none of the rallies of gold or oil. Propane is a derivative product of oil and gas production and indeed follows the latter pretty closely in wholesale price. It made sense to me in April that your propane bills should be lower this year than last. Now we have some data to compare, a faithful reader has reported the recent renewal of his one-year propane contract:
Last year (July/August contract), $2.50/gal.
This year (July/August renewal), $2.35/gal. down 6%
I filled my tank from the same vendor in December and again in June without the advantage of a yearly contract (i.e. retail, single-fill price):
June/09, $2.75/gal. down 8%
I'm sure you have your own comparison and now enjoy some decrease in price. The question I have is why these prices aren't a whole lot cheaper! Let's look at wholesale prices taken from the futures market:
2008 PROPANE peak price $1.95/gal (6/08)
2008 PROPANE May contract $1.85/gal
2009 PROPANE May contract $0.64/gal down 65%
2008 PROPANE August contract $1.70/gal
2009 PROPANE August contract $0.80/gal down 53%
I imagine propane distributors hedge their fuel contracts like airlines so it is difficult to predict actual savings for Eureka. Hedging is good since it avoids wild swings in your propane costs but things still seem out of whack given the dramatic downturn in wholesale price. I certainly don't want to make an enemy of my propane supplier but am curious about the large difference between retail and wholesale pricing over the last year. Are there readers out there that can help the ole Colonel better understand this disparity?
Enough whining, let's walk the walk:
Oil is down $0.21 to $66.95 in early trading (September contract); Gold is down $2.3 to $952.5 (August contract); Silver is unchanged at $13.770(September contract); Copper is up $0.05 to $2.5245 (September contract); Molybdenum holds at $14.50.
The DOW is down 32.65 points to 9036.64; the S&P 500, down 7.26 points to 969.03. The miners are mixed today:
Barrick (ABX) $35.32 up 0.66%
Newmont (NEM) $41.61 down 0.36%
General Moly (Eureka Moly, LLC) (GMO) $2.63 up 1.16%
Freeport McMoran (FCX) $59.46 down 0.49% (a bellwether mining stock spanning gold, copper & molybdenum)
Steel stocks are mixed (a "tell" for General Moly):
Nucor (NUE) $44.77 up 0.95% - domestic steel manufacturing
ArcelorMittal (MT) $37.04 up 0.16% - global steel producer
POSCO (PKX) $97.53 down 0.36%- South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is up 0.11% to $1,079,498.32
P.S. Today's Potash report was derived from a Thomson Reuters article in today's InfoMine.