Fertiliser may not be glamorous but it can be highly profitable. Rising demand for the nutrient is prompting a rally on shares in Saudi Arabian Fertiliser Company (SAFCO).
SAFCO, a unit of Saudi Basic Industries Corporation, the world's largest maker of petrochemicals, climbed to its highest in more than two years on the Tadawul All-Share Index on Saturday - the first day of the Tadawul's trading week.
The company shows no sign of weakening as fertiliser use is expected to grow over the next year. Rising prices for agricultural commodities means more land is being cultivated and more plant nutrients purchased.
World fertiliser use is forecast to increase 4.7 per cent to a record 171.4 million tonnes in the 2010-2011 crop year, the International Fertilizer Industry Association, based in Paris, said last week.
A price increase across agricultural commodities is the result of multiple factors including consecutive years of falling yields of cotton and sugar; reduced exports of wheat after droughts in Russia, Europe's biggest wheat producer, and Ukrainian cuts in supply; and a lower than expected maize yield in the US.
Investors are also considering buying into agricultural commodities as an alternative hedge against unstable market conditions.
"SAFCO's share price is correlated to the nitrogen-based fertiliser urea [and] the price of this has been rising ever since a bottom in December 2008 and January 2009," said Ahmed al Qahtani, an analyst who tracks the stock at the Saudi bank NCB Capital.
Mr al Qahtani has a "neutral" recommendation on the stock and a price target of 177 Saudi riyals. The stock fell 0.6 per cent to 159.25 Saudi riyals yesterday.
"The need to produce on arable land is increasing as the population increases, and fertilisers is one of the key methods to do that. We think [SAFCO's share price] will continue to rise with urea, and this is not a cyclical thing," he said.