Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

It's not easy feeding the world's biggest population. Chinese imports account for about a fifth of the global trade in potash, one of the three most important crop nutrients alongside nitrogen and phosphate.

In theory, that should give Asia's biggest economy an outsized interest in plans for a merger between Canada's Potash Corp. and Agrium, two of the top producers of the chemical.

Beijing generally doesn't like to see too much concentration in the markets for the commodities on which it depends. When BHP Billiton launched a takeover for Rio Tinto in 2008, state-owned aluminum giant Chinalco built a 13 percent stake in the target, helping to avert a deal that would have merged the No. 2 and No. 3 producers of iron ore.

Fertile Ground
Share of 2013 global potash production capacity by major producers
Source: Potash Corp.

In the case of potash, that horse has already bolted. The global market was for years dominated by two groups acting effectively as cartels: Canpotex, which sells Potash Corp., Agrium and Mosaic product outside North America, and an alliance between Russia's Uralkali and Belaruskali from neighboring Belarus.

Chinese potash prices have fallen by almost half since the latter combination broke up in 2013, but Canpotex is still in operation and there are signs that even the schism between the two Eastern European producers may be starting to heal. 

Crop Failure
Spot prices for potash delivered in China have fallen by almost half over the past three years
Source: Green Markets, Bloomberg

"Let's agree how much we will produce. Let's share the market and let's not compete. It will bring good dividends," the local CTV network quoted Belarusian President Alexander Lukashenko as saying in relation to the two companies in June.

As a hoary old China trope goes, there's both danger and opportunity in the current situation.

The risk is that the current low prices for potash will start to rise again once the market grows more concentrated. But there's an opportunity, too, which Beijing should seize: Rather than using its antitrust powers to beat a Potash-Agrium merger that will in any case make little difference to Canpotex's marketing muscle, it should use some of its cash to join the dealmaking party.

Below Sea Level
You have to go back to 2005 before Israel Chemicals' share price was as low as it is now
Source: Bloomberg

That's not to say any of the possible transactions would be easy.

Israel Chemicals, the fifth biggest by production capacity, has a market value of about 20.5 billion shekels ($5.4 billion), so could be had for a fraction of the $43 billion that state-owned ChemChina is shelling out for Swiss agrichemical business Syngenta. Chief Executive Officer Stefan Borgas even knows ChemChina well, thanks to his seat on Syngenta's board.

But Israel has a special state share in the company, which allowed the government to block Potash Corp.'s attempted takeover deal in 2013 on national-interest grounds.

While Israel Chemicals is now looking in need of a wealthy benefactor -- it's been in talks with banks about selling bonds, hybrid securities or assets in an attempt to reduce debt, people familiar told Bloomberg News last month -- it would take some impressive diplomacy for China to buy out the second-biggest company on the Tel Aviv exchange.

Similar considerations probably rule out Germany's K+S, despite the fact that its shares have been skirting their lowest levels in a decade. Potash Corp. gave up on a proposed $8.8 billion bid for the company last year after Berlin mooted taking a blocking stake to poison any deal, according to Handelsblatt newspaper.

There is one obvious option left, but it's not for the faint-hearted. A controlling share in Chile's SQM has been on the market since December after former chairman Julio Ponce announced the sale of one of the holdings he uses to control the business.

SQM has excited investors as a producer of lithium for rechargeable batteries, but most of its profit comes from potassium products and fertilizers. The problem is a bitter trench war with the Chilean government that threatens to strip SQM of its rights to mine the world's second-largest lithium deposit on the Atacama salt flats.

Cheap at the Price
Blended forward 12-month EV/Ebitda valuations of major potash producers
Source: Bloomberg

That shouldn't be enough to put off a Chinese buyer with its eye on the long term. Even after its shares surged 67 percent over the past year, SQM is still trading on a lower valuation than Potash Corp. and Mosaic -- and if any entity has the deep pockets and clout to quell the fight between Santiago and SQM, it's Chile's largest trading partner, China Inc.

Most of the players looking to buy into SQM right now regard those contentious lithium rights as the heart of the business. A potash-focused investor could afford to see them as an optional bonus.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Haaretz newspaper reported in March that Borgas had even held talks with ChemChina Chairman Ren Jianxin about taking up the top job at the Swiss company post merger, although the report was denied by Israel Chemicals and Borgas is still in his job.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net