Potash Rift Seen Lasting as Asia Sales Said to Rile Uralkali
A dispute between the former Soviet Union’s two largest potash producers shows little sign of being resolved quickly as predictions that the commodity’s price will plunge roil the $20 billion market.
A pact between Belarus’s Belaruskali and OAO Uralkali (URKA) in Russia helped to buttress prices for eight years in the global market for potash, a vital nutrient for corn and soybeans. That partnership fell apart at the end of July when Uralkali accused the other producer of undermining their sales accord.
The relationship, under strain all year, finally frayed over how both companies courted foreign buyers. Belarus President Aleksandr Lukashenko grew dissatisfied with being the junior half of the partnership and the limits placed on output at state-owned Belaruskali, according to people familiar with the situation.
Uralkali, led by Chief Executive Officer Vladislav Baumgertner, was angered by Belaruskali selling to Asia outside their joint venture, even as both sides were in talks aimed at ending the conflict, said the people, who asked not to be named because they weren’t authorized to speak.
So far neither side has shown willingness to patch up their differences since the split announced July 30 sent shares of potash producers tumbling as much as 24 percent from Moscow to Tel Aviv to Toronto.
“We don’t expect the two companies to be back working together very soon,” said Konstantin Yuminov, an analyst at Raiffeisen Bank in Moscow. “Uralkali is ready for talks, but only on terms that will suit it.”
Belaruskali sees the potash market reviving next month and won’t renew cooperation with Uralkali unless the Russian producer changes its strategy or ownership, Belaruskali CEO Valery Kirienko told reporters Aug. 19 in Soligorsk, Belarus. Uralkali’s move was unilateral and unexpected, Belaruskali said the same day in a statement.
Potash is a salt containing potassium that was deposited by ancient seas. The commodity, which helps crops resist drought, is typically found underground between rock strata. About 80 percent of global reserves are located in just four countries: Canada, Russia, Belarus and Germany.
Despite the importance of potash in agriculture and the size of the market -- sales were a record 57 million tons in 2011 -- the commodity isn’t traded on any exchange. Until last month, two groups of companies controlled about two-thirds of the world’s production capacity, negotiating sales contracts, sometimes with entire countries, at a fixed price that would then become the global benchmark for months.
One of those groups was Belarusian Potash Co., or BPC, the export sales joint venture between Belaruskali and Uralkali that split amid acrimony. The other group, Canpotex Ltd., is a similar venture between the three biggest North American producers.
The coordination of exports isn’t a new feature of the potash market. A cartel of German producers endured for most of the first half of the 20th Century. Saskatoon, Saskatchewan-based Canpotex, which started operating in 1972 to coordinate sales of potash mined in the Canadian province, is exempt under the country’s antitrust laws because it doesn’t sell to domestic farmers.
Like Canpotex, BPC’s members adjusted output to support prices. Having quit the venture, Uralkali plans to produce at full capacity to gain a greater market share.
Uralkali, which says prices may fall to less than $300 a ton from about $400 now because of the move, is the industry’s lowest-cost producer and may be best-placed to survive the slump. K+S AG (SDF) of Germany is among producers with mines that may barely break even with potash at less than $300, according to Green Markets, an information provider that’s a unit of Bloomberg LP, the parent of Bloomberg News.
The roots of the discord within BPC can be traced back to 2011, when Uralkali completed its $7.8 billion takeover of Russian rival OAO Silvinit, said Oleg Andreev, managing director at Minsk-based consultant EnterInvest.
The deal enabled Uralkali to overtake Belaruskali in terms of sales volume, making it the world’s largest potash producer. It also accounted for most of the tonnage sold by BPC.
Lukashenko became unhappy with this outcome and the way that Belaruskali had to moderate its output when prices dropped, the people familiar with the situation said.
Both companies idled capacity last year as the market weakened. Uralkali had 30 percent of its capacity offline, while Belaruskali had 23 percent, according to a presentation from the Russian producer.
“Lukashenko didn’t like this price-over-volume strategy at all and was seeking a higher utilization rate for Belaruskali,” said Elena Sakhnova, an analyst at VTB Capital in Moscow.
The Belarus leader also disliked that Uralkali regularly sold potash through its own trading unit, the people said. According to the joint-venture agreement with Belaruskali, Uralkali could ship potash outside BPC for direct sales to China by rail.
Spokesmen for the Belarus government, Belaruskali, Belneftekhim -- the state energy company that manages Belaruskali -- Lukashenko and billionaire Suleiman Kerimov, Uralkali’s largest shareholder, declined to comment on relations between the potash producers.
One reason Uralkali was allowed to circumvent BPC was so that it could get loans against its exports. Uralkali was also using its trading unit because U.S. sanctions on Belarus meant BPC couldn’t sell in America.
Uralkali has shipped 69 percent of its exports via its trading unit so far this year, according to Marina Kostiuchenko, a spokeswoman for Belneftekhim. Uralkali declined to comment on the sales.
BPC received a setback on Dec. 31 when North America’s Canpotex beat it to sign the first supply contract with China in nine months. Canpotex agreed to sell 1 million tons at $400 a ton, about 15 percent less than the previous price benchmark.
“Canpotex didn’t like Uralkali boosting potash sales to China by rail and offered China a price cut, which BPC didn’t expect,” Raiffeisen’s Yuminov said.
While BPC followed in January with a Chinese pact at the same price and volume, it had lost market share to Canpotex, Sakhnova said.
The breakdown of BPC gathered pace in January. That’s when Belaruskali also started selling potash independently of the venture, Kostiuchenko said. Belaruskali has sold 45,000 tons outside of BPC this year, or less than 2 percent of its exports, she said.
Lukashenko “didn’t intend to break up the venture, he was just seeking to put some pressure on Uralkali,” said Yulia Bushueva, managing director at Arbat Capital in Moscow.
Still, the consignments were sufficient to undermine the partnership between the producers, according to Uralkali.
For Lukashenko, who has governed without interruption for 19 years, potash has huge strategic importance. It’s one of the most vital industries in Belarus, where the average gross domestic product for each of its 9.5 million inhabitants is about half that of Russia, according to World Bank data. Belaruskali accounts for almost 20 percent of the country’s budget.
Belarus was dubbed Europe’s last dictatorship by former U.S. Secretary of State Condoleezza Rice because of its human-rights record and Lukashenko’s grip on power. The 58-year-old president is known to his countrymen by the nickname “bat’ka,” meaning father.
“Where Belarus is involved, everything is a one-man show,” Arbat’s Bushueva said. “Lukashenko is highly ambitious and with time he became less happy” with BPC.
BPC was created in 2005 after Lukashenko called for the elimination of the “crooks” he said were acting as intermediaries in the potash trade, the president’s press service reported in May.
He has walked a fine line between pledging loyalty to Russia while trying to limit the economic influence of Belarus’s much larger neighbor. Relations with Russian President Vladimir Putin have been strained at times, including in January 2011, when Russian crude oil imports to Belarus were briefly cut off after the countries failed to agree on price.
Despite this turbulent history, the dispute over potash wasn’t driven by politics, Uralkali CEO Baumgertner said in a July 31 interview. Nor did Uralkali investor Kerimov ask Putin to intervene, the people familiar with the situation said. Dmitry Peskov, a Putin spokesman, declined to comment on Uralkali.
Kerimov, 47, has a 22 percent stake in Uralkali worth about $3 billion. He built his fortune by investing in various industries including real estate and banking. Kerimov owns soccer club Anzhi Makhachkala in his native Dagestan and 40 percent of Polyus Gold International Ltd. (PGIL), Russia’s largest gold producer. In 2006, he was left in a medically induced coma and with burns covering 70 percent of his body after crashing his Swiss lawyer’s black Ferrari Enzo on the Promenade des Anglais in Nice on the French Riviera.
To rescue the faltering relationship with Belarus, Kerimov reached out to Lukashenko, visiting him in Belarus at least twice in 12 months, the people said. He appeared to have some success in May, when both sides agreed to a commission created by Lukashenko that would discuss the future of BPC. The president announced the appointment of his son Viktor and local KGB chief Valeriy Vakulchik to ensure the impartiality of the new body.
“I am a supporter of one powerful trading channel, in which there will be a parity of interests,” Lukashenko said at the time.
But even after the commission was created, Belaruskali still sold potash outside of BPC, according to the people familiar with the matter. Uralkali also was displeased by Lukashenko’s state visit to China in mid-July and Belaruskali’s meetings with Brazil and India to discuss potash supplies, the people said. Brazil is the second-largest potash user and India is the fourth-biggest, according to data compiled by Bloomberg.
The tipping point for Uralkali came July 25 when Lukashenko appointed Elena Kudriavets as director general of BPC without consulting the Russian producer or informing it of the decision, the people said.
Uralkali’s board approved the split from BPC several days later. Its July 30 announcement that it would sell freely in the market and produce at full capacity sent shares of potash producers crashing globally as investors speculated the price of the commodity would collapse.
Belaruskali said Aug. 19 that Uralkali’s “regretful decision” came as a surprise as both producers had reached a “compromise agreement” over BPC in June.
“The news was an absolute shock,” Arbat’s Bushueva said. “We all knew that there were some issues within the cartel, but nobody expected that the divorce would come so quickly.”
Some investors in Uralkali got out before its shares plunged 19 percent on July 30. Four days previously, Uralkali said billionaire Alexander Nesis had sold his 5.1 percent stake in the Berezniki-based company. And two weeks earlier, Uralkali completed a $1.3 billion buyback of shares from Zelimkhan Mutsoev.
Russia’s Financial Markets Service said Aug. 13 it asked the Moscow Exchange for information on trading in the shares. Nesis had an existing plan to sell his Uralkali stock, said Vladislav Vershinin, his spokesman. Uralkali said Mutsoev was reorganizing his finances to comply with the requirements of being a Russian member of parliament.
Uralkali advanced 2.8 percent to $24.40 in London trading today. It’s down 36 percent this year.
The BPC split also sparked speculation that Canpotex will follow suit and unravel. Competition from Uralkali will put pressure on the group, Charles Neivert, an analyst at Cowen Securities LLC in New York, said July 30.
The three big North American producers that control Canpotex -- Canada’s Potash Corp. of Saskatchewan Inc. and Agrium Inc. (AGU), and Mosaic Co. of the U.S. -- have said they expect no change in how they will export.
Potash Corp. CEO Bill Doyle said Belaruskali and Uralkali may eventually resolve their differences. The dispute won’t last because it’s too destructive and “logic tends to prevail,” he said Aug. 7, emphasizing that global potash demand will continue to grow, helping all producers.
Kerimov and Baumgertner met in early August to talk about potash with Russia’s Deputy Prime Minister Arkady Dvorkovich and Sergei Roumas, chairman of Belarusian Bank of Development and Reconstruction, according to the people familiar with the situation. Roumas also leads the special potash commission that Lukashenko created. Nothing was decided at the meeting and there was no agreement on future discussions, the people said.
Spokesmen for Dvorkovich, Belaruskali and Roumas’s bank declined to comment on the talks.
For now, the split looks like it could be permanent. BPC’s Russian staff are moving out of the venture’s office in Minsk, the Belarus capital, two people with the knowledge of the situation said. Uralkali is running out of space to accommodate them in its Moscow office, the people said.
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