The collapse of a cartel in the potash market slams producer stocks—and is another blow to commodities bulls; How a determined China broke up a global fertilizer cartel

Updated July 30, 2013, 10:19 p.m. ET

Russian Potash Producer Signals End to Global Cartel

Uralkali Pulls Out of Sales Partnership With Belarus

ALISTAIR MACDONALD And LUKAS I. ALPERT

The collapse of a cartel in the potash market slams producer stocks—and is another blow to commodities bulls. Tatyana Shumsky reports.

MOSCOW—A cartel that effectively set prices for one of the world’s most important agricultural commodities tottered Tuesday, sending markets into disarray while perhaps promising lower food prices around the globe. The upheaval began here, after Russian potash producer UralkaliURALL -14.62% said it was pulling out of its sales partnership with Belarus, the linchpin of one of two groups in a global cartel commanding two-thirds of a nearly $22 billion market for the fertilizer ingredient. The announcement sent potash-mining stocks into a tailspin around the world after Uralkali predicted the move would slash prices by 25% to about $300 a metric ton by the end of year.Investors raised concerns that falling prices would spur large potash miners to ramp up production in a bid to increase market share, sending prices even lower.

However, the prospect of cheaper fertilizer cheered farmers from the U.S. to India.

“The existing global market structure has been demolished,” said Vladimir Dorogov, an analyst at Alfa Bank in Moscow. “Customers everywhere will now have more power to negotiate lower prices. It’s a huge rebalancing for global potash.”

For years, a majority of the world’s potash—a potassium-based fertilizer ingredient that strengthens plant roots—has been sold through two marketing groups: Belarusian Potash Co., or BPC, and North America’s Canpotex. The two traders have set identical prices in major markets such as India and China, operating what some customers say is a cartel similar to the exclusive diamond trade. The companies say the groups market, sell and ship the product, denying they are cartels.

“It is astonishing… It’s like Saudi Arabia dropping out of OPEC,” said Laura Lau, an investor in commodities companies for Toronto-based fund manager Brompton Group.

Uralkali said it was stopping sales through BPC—which sold potash for Uralkali and mining company Belaruskali and claimed to single-handedly control 43% of the world’s market—because of disagreements over sales requirements.

The two had been partners for eight years, riding a long and profitable wave in which potash prices surged to close to $900 a ton just four years ago, before sinking to around $400 this year.

In the first decade of the century, the price of potash more than tripled as demand increased from China and India. That fueled a boost in supply that outpaced demand, particularly in India, where a fall in the rupee and a decline in government farming subsidies made the product less affordable.

Between 2000 and 2010, the price of potash more than tripled. Workers at potash producer Uralkali.

Spokesmen for BPC and Belaruskali both declined to comment.

The collapse of BPC left some analysts mulling the future for Canpotex, which deals in potash produced by Potash Corp. of Saskatchewan Inc., Mosaic Co. andAgrium Inc., AGU.T -5.00% and is now the world’s only major trader of the fertilizer ingredient.

Shares in Uralkali, which accounts for about one-fifth of global potash production, were briefly suspended from trading Tuesday afternoon in Moscow after falling more than 20%.

Shares of the world’s largest producer by capacity, Canada-based Potash Corp. of Saskatchewan, closed down 16.5% in New York, while Mosaic lost 17.3%.

Major potash miners were digesting the news. Executives from the three Canpotex members talked on the phone Tuesday morning, according to one person familiar with the conversation.

“We are still trying to sort it out,” said Mosaic finance chief Larry Stranghoener.

Mr. Stranghoener said the move by Uralkali will affect short-term prices but market fundamentals for potash are strong given global population growth and changing diets.

Executives and some analysts wondered whether Uralkali had dropped out to force Belaruskali, which is responsible for a significant slice of Belarusian exports, to come to a settlement under its terms.

“It is hard to say how much is gamesmanship and what is real,” said Richard Downey, an investor-relations executive for Agrium.

Germany’s K+S criticized Uralkali, saying the move had “caused significant irritations.”

Steep declines in the price of potash would likely roil an industry already in flux.

Australian mining giant BHP Billiton Ltd. BHP.AU -0.31% has hesitated to proceed with its proposed $14 billion Jansen mine in Canada, and as many as 75 startups have been struggling to raise the large amounts of capital they need to begin mining.

Potash miners spent the day on the phone reassuring investors.

“It’s painful to look at this sector and see billions of dollars in value reduction,” said Cristiano Veloso, CEO of Brazilian miner Verde Potash.

Mr. Veloso also called the Brazilian government to brief it on the likely effects on a market it wants to support using loans and tax breaks to encourage domestic production to replace exports.

Potash is a politically sensitive resource that often attracts government interference. In 2010, the Canadian government rejected an attempt by BHP to buy Potash Corp., saying it was not in Canada’s interest. Analysts estimate that, in a country that controls half the world’s potash reserves, around half a percentage point of Canadian GDP is based on sales of the commodity.Analysts estimate that, in a country that controls half the world’s potash reserves, around half a percentage point of Canadian GDP is based on sales of the commodity.

Uralkali said it would now market its fertilizer through its own subsidiary, Uralkali Trading. It said it had signed an agreement to exercise an option with China’s fertilizer importer, CNAMPGC Shanghai Corp., to deliver an additional 500,000 tons of potassium chloride within the framework of its 2013 contract. In January, BPC had negotiated a one-million-ton deal with China for the first half at $400 a ton.

Uralkali said it would try to make up for the loss in revenue from the expected drop in potash prices by boosting sales, targeting 13 million tons in 2014 and 14 million tons in 2015, up from an expected 10.5 million this year.

‘The end of the potash world as we know it’ is no exaggeration

Peter Koven | 13/07/30 | Last Updated: 13/07/30 6:47 PM ET
For the potash industry, this would change everything.

The break-up of a potash marketing cartel may signal the deathknell for plans by BHP Billiton Ltd., the biggest mining company, to spend as much as US$15-billion to expand into production of the crop nutrient.

OAO Uralkali, the world’s largest potash producer, today quit a marketing venture that controlled about 43% of global exports and signaled prices may fall by as much as a quarter. BHP’s Jansen project in Canada contains a 3 billion metric ton resource. Continue reading.

If Russian producer OAO Uralkali follows through on its plan to max out production and collapse one of the sector’s two trading arms, the industry’s oligopoly-like business model is thrown out the window.

The days in which the potash producers withheld production to maintain pricing influence could break down completely. Instead, experts said the stage would be set for a dramatic battle for market share, with the companies running at much higher production capacity and selling far more product. Higher supply would mean lower prices, greater competition and a culling of higher-cost producers and eager new entrants.

In short, the potash business would start to resemble a normal commodity business. BMO analyst Joel Jackson called it “the end of the potash world as we know it,” which is no exaggeration.

Markets were rattled at that prospect. Shares of every potash producer in the world plunged on Tuesday as investors absorbed the idea of global prices falling by US$100 a tonne or more. The losses moderated in the afternoon amid speculation that Uralkali may pull back on its plan. Potash Corp. of Saskatchewan Inc.’s shares fell 16% with a whopping 27 million shares changing hands.

Uralkali’s announcement was extraordinary, both because it proposed a plan to blow up the industry, and then carefully quantified the impact.

The Russian company said it is breaking up the potash marketing venture Belarusian Potash Co. (BPC) because its partner Belaruskali was selling additional potash outside of BPC. If Belaruskali would not maintain sales discipline, Uralkali saw no reason to do it either.

As a result, Uralkali plans to produce at its full capacity of 13 million tonnes a year, significantly above the 10.5 million tonnes it is currently producing. A company spokesperson told the Financial Post that it expects rivals to follow suit and boost production, which could push prices below US$300 a tonne this year. They are currently above US$400, meaning the drop could be in excess of 25%.

“Being the lowest-cost producer with highest potash capacity, having the ability to supply to China by rail, we hope to increase our share in all major markets,” the spokesperson said.

Currently, global potash exports are dominated by two trading companies: BPC and Canpotex Ltd., which is controlled by the Saskatchewan producers Potash Corp., Agrium Inc. and Mosaic Co.

These two trading companies, often called cartels by critics, have been very disciplined about slashing production in order to match supply with demand and keep prices elevated. In 2013 alone, Potash Corp. plans to cut production by 3.5 million tonnes, which amounts to 28% of its capacity.

It is possible that Uralkali thinks these curtailments have gone too far. It is the industry’s lowest-cost producer, and some have argued that the company is hurting itself and helping weaker rivals by cutting production and propping up prices.

On the other hand, many experts suggested that Uralkali is bluffing to force Belaruskali into a settlement that would keep the oligopoly structure intact.

“This is not the first time that Russian producers have had disagreements,” Agrium spokesman Richard Downey said. “It is important not to overreact to a single statement from one player in the industry and we plan to continue with normal course of operations.”

The end of the potash world as we know it

If Uralkali follows through with its plan, then the potash industry could transform into a volume-first business instead of a price-first business.

Cost control will become more important than ever as prices decline. Uralkali has a big advantage, as its stated cash costs are only about US$65 a tonne. The big North American producers also have competitive costs, though they are above US$100 a tonne. While these companies may have lower earnings in a lower-price environment, they can also produce at higher capacity and sell greater volumes (especially Uralkali and Potash Corp., which have the most spare capacity).

Additionally, they stand to benefit as other projects get shelved.

High-cost producers like Intrepid Potash Inc. and K+S AG require very healthy prices to generate good profits from their operations. They would struggle greatly if prices fall too far.

The news is worse for companies hoping to build a greenfield potash mine. They have assumed much higher prices in their economic studies than the US$300 level that Uralkali is talking about. Most notably, analysts doubt that BHP Billiton Ltd. will approve its massive Jansen project in Saskatchewan if lower prices hold over the long term.

“There’s no way BHP is going to build Jansen, and there’s no way these little projects around the world are going to get going without the cartels protecting price,” said Jed Richardson, chief executive of Great Quest Metals Ltd.

There is a great irony here. The existing potash producers were expected to lose their pricing influence over time as BHP and other new entrants came into the market with new supply. By killing Canpotex and BPC, they could get the same result while keeping new competitors out.

Potash price war may signal deathknell for BHP Billiton’s US$15-billion mine plan

Jesse Riseborough, Bloomberg News | 13/07/30 | Last Updated: 13/07/30 2:03 PM ET
The break-up of a potash marketing cartel may signal the deathknell for plans by BHP Billiton Ltd., the biggest mining company, to spend as much as US$15-billion to expand into production of the crop nutrient.

 

Shares of North America’s three main potash producers plunged on Tuesday after the blockbuster announcement that Russian company OAO Uralkali plans to break up one of the two main potash marketing groups to boost its sales. Read more.

OAO Uralkali, the world’s largest potash producer, today quit a marketing venture that controlled about 43% of global exports and signaled prices may fall by as much as a quarter. BHP’s Jansen project in Canada contains a 3 billion metric ton resource.

“This could be a game changer” for the project, Heath Jansen, an analyst at Citigroup Inc., wrote today in a note to clients. “Uralkali appears to have started a price war. We would argue that the risk reward of proceeding with the project is moving toward not proceeding.”

A spokeswoman for BHP declined to comment.

The move by Uralkali to end its venture with Belarus sent shares of potash producers plunging as much as 27% from Israel to Germany to Canada and the U.S. as investors speculated a flood of supplies will lead to lower prices for potash, a soil nutrient that strengthens plant roots. Uralkali, part-owned by billionaire Suleiman Kerimov, said it exited the venture after Belarus undermined the sales agreements.

BHP Chief Executive Officer Andrew Mackenzie last month said the mine was “a great option, but it’s just an option.” According to the Melbourne-based company’s website, Jansen has the “potential to become one of the world’s premier potash mines.”

While the company has said it sees the fertilizer ingredient becoming the fifth pillar of its business in addition to copper, iron ore, coal and petroleum production, BHP has delayed a final investment decision amid a freeze at the company on approving new projects to combat waning demand for raw materials.

Uralkali now plans to boost sales to consumers including China, which imports about a fifth of global supplies, the Berezniki, Russia-based company said. The change in trading policy may push prices below US$300 a ton, CEO Vladislav Baumgertner told reporters. That’s at least 25% below the current contract price for China.

Prices for the nutrient have been falling, demand is waning and stockpiles have been growing. The so-called price war started by Uralkali may last as long as 18 months, leading to even lower prices, Citigroup said.

“If everyone knocks down their price forecast, then obviously that’s going to make a lot of difference to a lot of people’s cash-flow models,” Paul Burnside, principal consultant on potash for London-based research company CRU, said today. “I’m fairly skeptical about further additions of capacity in general. I’m really struggling to see why it’s needed.”

BHP Partner

London-based Sirius Minerals Plc is among companies weighing new potash output. It is studying building a US$1.9 billion potash mine in a national park in Yorkshire, in northeastern England. The company requires approval from local planners and financing before starting development. The economics of the project can withstand a fall in prices, Chief Executive Officer Chris Fraser said in e-mailed comments to Bloomberg News today, after Uralkali’s annoncement.

“The expected margins within the York Potash Project are sufficiently robust to enable the project to withstand short term price downside scenarios,” Fraser said. “The long-term outlook remains for increased demand and the fundamentals of that demand remain strong.”

For BHP, the Jansen mine may cost as much as US$15 billion to build and the company may only proceed on a “de-risked basis,” either through selling a stake or bringing in a joint-venture partner to help fund construction, Bank of America Merrill Lynch analysts said last month.

Potash Corp. of Saskatchewan CEO Bill Doyle said in May the economics of Jansen “don’t work” and that it’s unlikely to proceed. BHP said in 2011 it had committed to spending US$1.2 billion on the project and almost US$2 billion in Saskatchewan as part of its “commitment to develop a world-class potash business in the province.”

A potash price of US$300 a ton cuts Citigroup’s valuation of Jansen from US$7.2 billion, at a US$500-a-ton estimate, to a negative valuation of US$2.2 billion, it said.

This development will affect their decision making process

BHP made a US$40 billion hostile bid for Potash Corp. in 2010 as it sought to add production of the crop nutrient. The bid was blocked by the Canadian government. Saskatchewan is the world’s biggest potash-producing region.

BHP may see the move by Uralkali as accelerating a switch to more market-oriented pricing for potash, a process it has encouraged in other commodities such as iron ore, and a development that may bolster its faith in Jansen’s economics.

“This development will affect their decision making process,” Sophie Jourdier, an analyst at Liberum Capital Ltd. in London, said today by phone. “Obviously a company like BHP looks at a very long-term view and it may be that they come to a decision that they still want to go ahead with this.”

Shares of potash producers plunge as Russian marketing group collapses

Peter Koven | 13/07/30 | Last Updated: 13/07/30 6:00 PM ET
Shares of North America’s three main potash producers plunged on Tuesday after the blockbuster announcement that Russian company OAO Uralkali plans to break up one of the two main potash marketing groups to boost its sales. The result is likely to be a sharp drop in global prices as the industry’s oligopoly-like structure is shattered and more supply hits the market.

The break-up of a potash marketing cartel may signal the end of mining giant’s plans to spend billions to expand into production of the crop nutrient. Continue reading.

Shares of Potash Corp of Saskatchewan Inc. plummeted as much as 23% after the announcement, while shares of Mosaic Co. dropped 25%. They pared some of those losses in the afternoon, with Potash Corp. ending the day down 16%, and Mosaic down 17%. Agrium Inc.’s shares fell a more modest 5%, as the company has much lower exposure to potash than its rivals.

Uralkali’s announcement puts an effective end to Belarusian Potash Co. (BPC), the big marketing venture between Russian and Belarusian potash producers. It controls about 40% of global potash exports. The other key marketing group is Canpotex Ltd., a joint venture between the three North American producers.

Investors are betting that Canpotex will find it impossible to maintain its pricing influence following the break-up of its only counterpart and increased supply in the market. Even Uralkali’s chief executive said that prices could fall below US$300 a tonne, according to reports. By comparison, they are a little over US$400 right now.

BMO Capital Markets analyst Joel Jackson called the announcement “the end of the potash world as we know it.” He believes potash earnings estimates will move “materially lower” and global price estimates could fall by US$100 a tonne.

“Discipline and price-over-volume leadership in the potash industry seem to have crumbled,” he wrote in a note.

The question is whether other potash producers will follow Uralkali’s lead and produce at or near full capacity to boost market share at the expense of price. Uralkali plans to produce 13 million tonnes in 2014, compared to 10.5 million this year. It decided to end its involvement in BPC after the Belarusian government cancelled BPC’s exclusive right to export potash from the country.

Uralkali has more flexibility than most rivals to operate in a lower-price environment because it has very low costs of US$62 a tonne, according to a company presentation. High-cost operations would have a much tougher time, notably those in Europe.

Canaccord Genuity analyst Keith Carpenter wrote that he had a long-standing concern about over-supply in the potash market, and that the pricing power held by BPC and Canpotex would eventually break down once the companies focused more on market share than pricing.

“This announcement is accelerating that expectation,” he wrote in a note.

Mr. Jackson of BMO noted that the industry could be better off in a volume-over-price environment once the short-term pain subsides. Sales volumes would improve substantially and greenfield projects, such as BHP Billiton Ltd.’s giant Jansen project, could get cancelled. However, he called it a “very risky” strategy.

How a determined China broke up a global fertilizer cartel

By Tim Fernholz @timfernholz

5 hours ago

The cozy cartel behind potash, a vital ingredient in fertilizer, has self-destructed after a key Russian member went rogue. Now producers are scrambling to adapt to a world where major buyers like China will set the price.

The remains of prehistoric oceans compressed into a salty mineral, potash is found deep underground in just a few places around the world, making its extraction an expensive proposition.

Two-thirds of the potash trade has been controlled by two major marketing groups who worked to keep prices high: A North American coalition including US firms Mosaic and Agrium and Canada’s Potash Corporation of Saskatchewan; and a European group that included Russia’s Uralkali and Belarussia’s Belaruskali.

But then Uralkali—which controls a fifth of worldwide production—pulled out of the European cartel, promising that prices will drop 25%, to $300 a ton. Investors certainly take a dim view of how the proceedings will effect major potash producers:

In the last decade, potash prices have risen considerably thanks to increasing demand for better food in populous emerging markets like China, India and Brazil, and the price-setting efforts of the companies who controlled the market. But over-capacity and farmers’ willingness to find other methods to fertilize their crops helped reduce prices, along with determined negotiations by the Chinese government.

The status quo has been “demolished,” and the situation is being compared to OPEC’s break-up. But the pressures on the markets likely made the cartel’s end inevitable. Read between the lines of this month-old industry analysis and you’ll get an idea: Even as new mines were being opened, Uralkali CEO Vladislav Baumgartner was fretting over whether his fellow producers will hold the price line in the face of China’s tough negotiating:  ”It depends on whether the competition is ready to decrease the price or wait with us for a more favorable market and at least a roll over price or even a better price.”

Now, it looks like  Baumgarnter’s company ran out of patience. When Uralkali pulled out of the marketing group today, it accused  partner Belaruskali of cutting side deals. But the first order of business at Uralkali’s new trading group was picking up an option to deliver orders of potash to, you guessed it, China.

Besides affecting existing producers, the cartel’s shake-up and expected drop in price could halt several large potash projects around the world: BHP Billiton’sCanadian claim; Sirius’ plan to dig in York, England;  and Argentina’s hopes to find a new company to exploit its own potash deposits.