The market for potash, a salt-containing potassium that is mostly found in Canada, Russia, Belarus, and Germany, has historically been controlled by a small number of entities. Uralkali, the world’s largest producer of this nutrient (20% of total sales), together with Belarus-based Belaruskali, had until recently negotiated export agreements under the marketing venture Belarusian Potash Co. (BPC). At its peak, BPS accounted for 40% of global output. Alongside Canpotex, which is comprised of Potash Corporation (POT), Agrium (AGU), and Mosaic (MOS), BPC controlled roughly 70% of global production. Needless to say, these cartels established global benchmarks.
A law passed in Belarus last year permitted Belaruskali to sell products outside of BPC. In protest, Uralkali walked away from the cartel. Moreover, BPS’ breakup had led to speculation that competitive pressures will drive Canpotex to unravel, as well.
With an intention to gain market share, Uralkali plans to operate at full capacity. Increased competition, according to it, would push potash prices sharply lower over the next six months. There are other concerns on the supply side. A spike in chemical prices during the late-2000’s led companies to initiate a wave of capacity expansions. Potash production grew by .5% annually until prices quadrupled during 2008 and 2009. A bevy of investments since then is positioned to buoy annual-capacity growth by 5% until 2017.
The market has reacted accordingly, with prices falling around the globe. In South America, this product’s value has fallen by roughly 10% in recent weeks, to $360 a ton. Concurrently, China is rumored to be looking to lock up supplies at $325 a ton, which would be a $75 discount from chemicals supplied earlier in the year. Recent price action, although not ideal, suites the Russian giant just fine, as it is the industry’s lowest-cost producer. Major nutrient makers estimate the cost of new mines at $2,000 to $3,000 a metric ton in Canada, compared to $1,000 in Russia. Moreover, while Uralkili expanded capacity during the last decade, its margins remained the highest in the sector.
With the viability of marketing cooperatives in question and prospects for a competitive operating environment high, equities of local agriculture-chemical makers have fallen sharply in recent weeks, with potash companies faring especially poorly. To make matters worse, BHP Billiton Ltd. (BHP) has reaffirmed its commitment to develop the Jansen project in Saskatchewan, Canada. Its management has so far budgeted a total of $3.8 billion to the mine purported to be the biggest potash deposit in the world. For this mining behemoth, the move would enable diversification, limiting its exposure to the sluggish iron ore market. But what happens to potash market fundamentals once production there starts? After all, the site is on pace to boost global output by 15%-18%, or 8-10 million tons.
Fertilizer-price weakness comes at a time farmers continue to experience auspicious operating conditions. A record harvest of corn in the U.S. will limit 2013 farm income, according to the U.S. Agriculture Department. Nevertheless, the agency expects this tally to approximate $120 billion, eclipsing the previous high of $118 billion established in 2011. Projections suggest crop prices in the years ahead will moderate from levels reached between 2010 and 2012, but should provide plenty of incentive for farmers to purchase nutrients.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.