Fertilizer and specialty chemical maker Israel Chemicals (ICL) is expected to face a challenging year due to weaker markets for crop nutrient potash in Europe and India, after it posted a 51% jump in fourth-quarter net profit.

ICL, the world's sixth-largest producer of potash, said on Tuesday its results were achieved due to higher prices for key products including potash and flame retardants as well as acquisitions.

Its shares rose 0.9% to 43.50 shekels, compared with modest gains on the broader Tel Aviv bourse. But some analysts see little upside in ICL's shares.

"Potash peers had already alluded to some degree of continuing nervousness from distributors about committing to fertilizer product," Bank of America Merrill Lynch analyst Andrew Stott wrote in a note to clients. "We continue to see a slower season in Europe than last year and expect lower Indian imports."

However, he said China's earlier-than-expected settlement for its semiannual contracts last week could kick-start some confidence in markets where farm economics are stronger than average, such as in the Americas.

Stott, who rates ICL as "neutral" with a 42 shekel target, said he prefers ICL to its larger German rival K&S, which posted a 9% rise in fourth-quarter adjusted earnings before interest and tax.

ICL said it is negotiating the sale of potash to customers in China, after Belarus Potash and marketing consortium Canpotex signed contracts with major Chinese importers this month for the supply of potash in the second quarter.

ICL's fertilizer segment sold 5.2 million tons of potash in 2011, down 6.9% from 2010 although at higher prices. It had signed contracts to supply customers in China 1.25 million tons at prices similar to those negotiated by the market's major suppliers. ICL also signed deals to supply 1.4 million tons to Indian customers at $490 a ton through March 2012.

Margin squeeze

"Though fundamentals for the fertilizer industry remain strong, we believe ICL will face some margin squeeze in 2012 due to rising costs and higher royalties," Citi analyst Andrew Benson said, referring to a deal it struck with Israel's government in late 2011 to pay 10% in royalties on minerals extracted from the Dead Sea.

ICL, which has an exclusive permit to extract minerals from the Dead Sea, had previously paid royalties of 5%.

ICL will also pay 3.04 billion shekels as part of a project to extract salt buildup on the Dead Sea floor.

Benson, who rates ICL a "buy" with a 48 shekel target, said the economic downturn and lower demand from India continued to hurt ICL in the first quarter, but its shares were undervalued.

ICL reported quarterly net profit of $370 million compared with a Thomson Reuters I/B/E/S forecast of $368 million and $245 million a year ago.

Revenue grew to $1.71 billion from $1.42 billion, a record for the fourth quarter, reflecting rising selling prices and consolidation of acquired companies.

Fertilizer production in the quarter was hit by equipment downtime, ICL noted.

"Most of 2011 was characterised by a recovery in the fertiliser market from the difficult crisis of 2008/2009," ICL said.

ICL, a subsidiary of holding company Israel Corp, said it would pay a dividend of $260 million for the quarter, up from $170 million a year ago.