Disclosure: I have no stock positions in any of the companies below, and own no potash futures contracts. I have no plans to initiate any positions within the next 72 hours.
The shift of the global potash market, price-over-volumes paradigm to volumes-over-price has begun. Thanks to Uralkali, no more withholding supplies to maintain high prices. Last Tuesday Russia’s Uralkali announced it would no longer trade potash through the marketing arm known as the Belarusian Potash Company (BPC) which accounted for 43% of global potash exports. Russia’s Uralkali and Belarus’s Belaruskali were together in the joint venture. The Belarusian government recently cancelled Belaruskali’s right to export Belarusian potash. Belaruskali was selling potash outside BPC to boost revenues. Uralkali will now export their potash through Uralkali Trading. The news resulted in a sharp decline of potash companies share price worldwide.
The global potash industry oligopoly-type business model formed by Canpotex and BPC will become dysfunctional as Uralkali’s bombshell aftermath creates a competitive potash market. Uralkali stands to regain its stock value providing prices don’t fall below expected since it’s a low cost producer. Uralkali’s plan to maintain cash flow is to increase sales by 3.5 million tons in 2015. Investors speculate increased supplies by Uralkali will be followed by other potash producers and drive potash prices down. At present, it would take months to gauge where the potash price will settle. Uralkali recently began a US$1.3 billion dollar share repurchase program prior to last Tuesday’s bombshell. This reacquisition of stock is deemed by many analysts as a value destructive buyback. On the other hand was it a future anti-takeover strategic policy by preventing a huge sell off when it severed ties with BPC?
The developments in the potash market have been very dynamic in recent years. Let’s take a look of these past highlights to achieve a perspective of the possibilities in the future. In 2010 Uralkali merged with home-based Silvinit. This is an example of Uralkali’s receptiveness to M&A. Australian BHP Billiton was unsuccessful in an attempted hostile takeover of Canada’s PotashCorp in 2010. The Canadian government blocked the takeover, claiming it was not in the best interest of the country’s people. What they didn’t say is Canpotex couldn’t allow PotashCorp to fall into the hands of BHP which would market production itself. In January this year, PotashCorp failed at a hostile takeover of Israel Chemicals Limited. Strong nationalistic objection to foreign ownership of state companies by the Israeli citizens and their government, proved PotashCorp’s efforts futile. This year major potash producers Uralkali, Belaruskali, PotashCorp, Agrium and three others settled US antitrust law violations, after being accused of potash price-fixing in 2008.
One conspiracy theory circulating in the fertilizer blogosphere is that Uralkali’s separation from BPC was linked to Russian internal politics and business gone sour. The reasoning for this theory derives from information that Russian Oligarch Suleimar Kerimov holds 17.2% of Uralkali, who is suspected of being the front man for secret Kremlin investments. Russian MP Zelimkhan Mutsoev sold his 6.4% stake in June before Uralkali’s bombshell and only now looks like an insider trade but it’s not. There is a new law in Russia that prohibits MP’s from having direct control over business assets. This conspiracy stems from unsubstantiated analysis from those in the west who don’t quite comprehend post-soviet Russia.
The other conspiracy theory propagating is that Uralkali’s design plan by dropping the bombshell was to force mining companies to become reluctant on big-ticket potash project spending. The focal target is BHP Billiton’s proposed US$14 billion Jansen project in Saskatchewan. This theory is improbable, and if true Uralkali didn’t do their homework accurately. BHP Billiton’s business strategy is not shifted by daily moves or monthly cycles in the market; all projects are assessed and analyzed for long term profits most of the time measured in years.
Belaruskali plans to expand potash exports to Brazil, nevertheless Verde Potash also has intentions for Brazil. It is not transparent as to who the major shareholders of Belaruskali are, however, it is possible that the state is in control and by proxy President Alexander Lukashenko who has been in power since 1994, utilizing some soviet era policies to govern the economy. Belarus’s economy is under pressure due to the Belarusian rouble constant devaluation. The possibility exists that this will lead to an unstable society, resulting in an uprising to remove President Lukashenko. In a chaotic state of affairs a likely hostile takeover of Belaruskali is conceivable.
The bi-lateral relationship between Russia and China has improved in the last decade and should not be ignored. China imports one fifth of global potash supplies. Uralkali already plans to increase potash shipments to China by rail. Close attention must be paid to future agreements between both countries. Many investors will tune in to PotashCorp’s President and CEO Bill Doyle who will be conducting a webcast on Wednesday August 07th. There is no way he can deny the negative effects on PotashCorp and Canpotex by Uralkali’s move. The future of the potash market is unpredictable and has become more volatile not only to underlying supply and demand fundamentals but geopolitical developments globally.
In conclusion, Uralkali’s break away from BPC is not self-destructive as mainstream media is claiming. In the long term, their low cost of production will grant them favourable contracts from China, India and Southeast Asia. Canpotex, the remaining fragment of this oligopoly will definitely not have the negotiating power it once had and there are more cards to play in the hand of the so called BRIC nations (Brazil, Russia, India and China) in the quest for food sustainability.
Potash store in Canada. Photograph: David Stobbe/REUTERS
origamiaround
ellievsbear
kaledo-art
annaxmalina
pixelskylines