A Century of International Potash Intrigue
In case you didn’t notice, the world’s potash markets went haywire last week, after the announcement that Russia's OAO Uralkali, the world’s largest producer of this crucial ingredient in fertilizer, suspended its participation in an alleged cartel with its long-time Belarus partner Belaruskali. Their joint marketing venture, the Belarusian Potash Co., produced at its peak 40 percent of the world’s potash, with much of the balance coming from Canpotex Ltd., another syndicate based in North America. Together these two set production quotas and divided global markets, ensuring stable prices and steady profits.
Uralkali’s motives for pulling out remain murky: It’s possible the company wants to coax Belaruskali into stricter compliance with their agreement's terms. More likely, by letting potash prices bottom out, Russia hopes to gain influence over Belarus and its autocratic leader, Aleksandr Lukashenko. Belaruskali is the most profitable company in Belarus, accounting for almost 6 percent of total exports. Should potash prices plummet, Belaruskali will become susceptible to a Russian takeover bid. That Uralkali’s majority shareholder, billionaire Suleiman Kerimov, is a reputed front man for the Kremlin increases the likelihood of this scenario.
Potash has long gone hand in hand with geopolitical power plays, even if its early history is rather humble. Potash got its name from the fact that it was originally manufactured by mixing wood ashes with lye and boiling them in a pot. The resulting water-soluble potassium salts (potassium takes its name from “pot ash”) proved indispensable for making glass, soap and gunpowder as well as for bleaching and dying fabrics. No single country controlled potash production; anyone with fire and wood could make it.
Nonetheless, it took a lot of wood to make a little potash, and so periodic shortages plagued the global economy, encouraging constant refinements in potash manufacture. The first patent granted in the U.S. was for an improvement “in the making of Pot-ash.”
Many substitutes for burning wood were tried (incinerating kelp was a big business for some time in various places) before natural deposits of potassium salts were discovered in Germany in the mid-19th century. Potash became divorced from its modest origins as “pot ash” and was transformed into a product of industry. It simultaneously became a top ingredient in new, chemical fertilizers that facilitated a global boom in agricultural production. As potash grew more important, German producers formed a cartel that fixed prices and managed production. Each time a new mine opened in Germany, threatening stability by undercutting prices, it was brought into the cartel and given a percentage of the total production quota. The world had to pay a price for potash determined by the cartel rather than market forces.
In 1909, three Germany potash producers refused to continue playing by those rules, instead brokering deals with U.S. fertilizer companies that undercut the cartel. In response, the German government imposed a prohibitive tax on export contracts set up outside the cartel. A diplomatic row ensued, with the U.S. government taking up the cause of the fertilizer companies, to no avail. The export tax forced the dissenting Germany companies to rejoin the cartel and nullify the contracts.
Despite losing World War I, Germany managed to maintain its stranglehold over the world’s potash supplies. In 1919, the Weimar government created the Reichskalirat (Potash Council) to supervise the Germany potash syndicate, or Kalisyndikat, “in accord with the general welfare of the German people.” That meant limiting production, guaranteeing high prices and levying punitive taxes on imports of potash into Germany should any other country be so foolish as to start up its own potash mines.
Germany briefly had a competitor in France. Under the terms of the punitive postwar settlement, France got its hands on the Alsace region, former home of many of Germany’s potash mines. France quickly began production, challenging Germany in global markets. Profit ultimately trumped national rivalry, however. In 1925, the two nations hammered out a cartel agreement that divvied up the global market. Each agreed to production quotas, with Germany grabbing 70 percent of the U.S. market and France the rest. They soon applied the same division to the world at large.
The Americans were furious; Herbert Hoover, then serving as secretary of commerce, confided to the secretary of state that “this is a governmental monopoly of the most vicious order,” one that gave the German government “full liberty to milk the rest of the world.” The U.S. filed suit against the Kalisyndikat, charging it with violating American antitrust laws, but this was an empty gesture. The most the courts could have done in those days was bar the newly created “International Potash Syndicate” from doing business in the U.S., and that would have crippled the American economy -- unless, of course, the U.S. had potash resources of its own to use as leverage.
Conveniently, U.S. government geologists found potash deposits in New Mexico in 1926. By 1929, the U.S. had its own potash producer: American Potash and Chemical, which was owned by the South African company Consolidated Gold Fields, based in London. The Germans immediately recognized the threat and put into motion a plan that was as brilliant as it was shady. The Kalisyndikat, working through an elaborate network of investment banks and shell companies that cloaked its movements, bought 90 percent of the shares of Consolidated Gold Fields, giving it control over U.S. potash fields. Soon enough, American Potash and Chemical was keeping its production in line with edicts issued by the Kalisyndikat.
The Franco-German cartel continued to thrive through the 1930s, despite growing tensions between the two countries. New U.S. companies that entered the market in the 1930s mysteriously ended up obeying the dictates of the Kalisyndikat, suggesting the Nazis kept the cartel alive and well until the outbreak of World War II. Other nations and territories that started mining potash -- Poland, the Soviet Union, Spain, even Palestine -- entered the syndicate in return for a cut of the total production quota.
The postwar order destroyed the old potash cartels, but new ones took their place. The end of the Cold War ushered in the current arrangement splitting the industry between the North American group and the now-imperiled one based in Belarus.
The latest potash drama may seem like something new, with a heavyweight -- Uralkali -- looking to exit rather than police an existing syndicate. A century of history, however, suggests the end game will be the same: by robbing Belarus of profits it needs, Russia probably will gain further control over its onetime partner and with it a bigger piece of the world’s cunningly contested potash trade.