The world’s eight largest potash miners, whose market control already exceeds that of oil cartel OPEC, are poised to tighten their grip on prices of the crop fertilizer as proposed mergers consolidate sales channels.
BHP Billiton Ltd.’s $40 billion hostile bid for Canada’s Potash Corp. of Saskatchewan Inc. would bring the Australian miner into the fold of the world’s largest potash marketing agent, Canpotex. In Russia, takeovers under negotiation would raise the pricing power of the second-biggest trading group, Belarusian Potash Co., said Fertecon Ltd., a U.K.-based industry consultant and price monitor.
“It’s a classic oligopoly,” said Fertecon director Barrie Bain. The “likely” merger of Russia’s two largest potash producers, OAO Silvinit and OAO Uralkali, will only boost the concentration of the market, he said. Billionaire Suleiman Kerimov, who with partners controls both companies, is seeking to combine them and sell their output via one Belarusian trader.
With the global population adding 75 million people a year, food demand is set to put further strain on crops, increasing the need for fertilizer. Consolidation among producers of potash, a form of potassium used to boost yields by helping plants withstand dry soil, has caused concern in countries such as India, the biggest importer last year, that prices will rise.
“India has limited land to support a large population and any attempt to monopolize and increase fertilizer prices would impact its use and affect productivity,” said U.S. Awasthi, managing director of the Indian Farmers Fertilizer Cooperative, or IFFCO, which buys from Potash Corp. among others. “Food prices will go up.”
A fivefold surge in potash prices over 2007-2008 led to at least eight class-action claims in the U.S. over alleged collusion, a charge the producers denied. Potash was among the last commodities to plunge in the global recession as suppliers cut output to prop up prices. Potash Corp. used a third of its capacity last year, while none of its seven largest rivals used more than 80 percent, Fertecon and Potash Corp. data show.
A successful acquisition of Potash Corp. by BHP would cut revenue to Canada’s Saskatchewan province by C$2 billion ($1.95 billion), the Conference Board of Canada said in a report commissioned by the provincial government. The board is an independent organization that researches economic and public policy issues. Potash said today the losses may be understated as they assume BHP wouldn’t mine potash at full output.
Fewer sales channels would boost the ability of the top eight -- Potash Corp., Mosaic Co., Belaruskali, Israel Chemicals Ltd., Silvinit, Uralkali, K+S AG of Germany and Agrium Inc. -- to coordinate output and buoy prices, which sank as low as $350 a metric ton in China this year from a record of about $1,000 for spot deliveries in 2008.
That control “targets the essential price recovery,” said Marina Alexeenkova, an analyst at Renaissance Capital in Moscow. “This is a positive time for mergers and acquisitions in the industry.”
Silvinit rose 1.3 percent to 20,066 rubles and Uralkali was up 0.1 percent as Moscow’s benchmark Micex index declined 0.3 percent at 5:49 p.m. local time. K+S gained 0.5 percent in Frankfurt trading and Israel Chemicals advanced 1.8 percent in Tel Aviv.
Canpotex handles exports for Potash Corp., Agrium and Mosaic, accounting for as much as 40 percent of global trade. Belarusian Potash, marketer for Uralkali and state-run Belaruskali, controls about 30 percent, which would rise to more than 44 percent if Uralkali merges with Silvinit.
A Russian tie-up would leave buyers with four main trading agents, allowing Belarusian Potash alone to manage a greater portion of sales than the Organization of Petroleum Exporting Countries, which controls 41 percent of global oil output. While OPEC’s 12 members hold 70 percent of proven crude reserves, Canada, Russia and Belarus have 80 percent of the world’s potash.
BHP, already developing Canada’s Jansen potash project, said in August it prefers to run its mines at full capacity and would seek to sell its potash independently of Canpotex should its bid for Potash Corp. succeed. The province of Saskatchewan has since put pressure on the company to remain committed to Canpotex on concern its exit would reduce the region’s revenue.
“Although potash producers do negotiate their selling prices with their customers, they have considerable bargaining power given the limited number of players,” the Conference Board of Canada said in its report released yesterday.
BHP may be paying lip service to antitrust regulators by suggesting a departure from Canpotex, said HSBC Holdings Plc analyst Andrew Keen. BHP has itself been known to put curbs on output, including coking coal and manganese last year, he said.
If BHP really did depart from Canpotex and run potash mines at full capacity, investor interest in the industry would plunge, said Xavier Majic, a senior analyst at Passport Management LLC in San Francisco. “You’d sell all your other potash” stock, he said.
Potash and oil aren’t the only concentrated markets. Coca-Cola Co. controlled 47 percent of the world’s soda market while PepsiCo Inc. had 21 percent in 2007, according to Euromonitor International. Gillette Co., a unit of Procter & Gamble Co., has a 72 percent market share in razors.
“Gillette’s monopoly does irritate me, but I can always grow a beard,” said Eric Kraus, head of strategy at Otkritie Financial Co. in Moscow. “It’s a little bit more difficult to go without food. The semi-cartel in potash may look very threatening in the event of renewed pressure on grain supply.”
The worst drought in half a century in Russia, the world’s third-largest grower in 2009, cut the last harvest and prompted the country to ban grain exports, pushing wheat futures to a 23-month high on Aug. 6.
The buyers’ biggest bargaining chip is the size of their market, IFFCO’s Awasthi said. India, which imports all the 5.6 million tons of potash it needs every year, will resist any price moves above the current $380 a ton, he said.
While Indian companies don’t have the cash to trump BHP’s bid for Potash Corp., Awasthi said, the world’s biggest potash-buying nations are taking steps to weaken the influence of the largest producers.
Brazil has mandated Rio de Janeiro-based Vale SA to start developing its own potash deposits, and the company said in August it would invest $12 billion by 2014 to become the world’s No. 2 in potash and phosphate.
State-controlled companies in China, the biggest consumer of rice and wheat, have bought undeveloped potash fields in Canada and notified Belarus of an interest in buying a stake in Belaruskali, a producer that also attracted interest from India.
China’s Sinochem Group has emerged as the likeliest bidder to rival BHP’s offer for Potash Corp., according to three people familiar with the matter. The East Asian nation, the largest potash importer in 2008, needs more productive farmland to supply food for 22 percent of the world’s population using less than 10 percent of the globe’s arable land.
“The risk of sovereigns getting involved and building big mines is real,” Majic of Passport Management said. “There are assets out there that if you put enough money in, they are big enough to disrupt this industry.”