Creating the OPEC of Fertilizer

The world's largest potash miners, whose control over output already exceeds that of OPEC over oil, are poised to tighten their grip on the industry even further.

BHP Billiton's (BHP:US) $40 billion hostile bid for Canada's PotashCorp (POT) would combine BHP, which plans to produce 8 million tons a year of potash on its own, with the industry's biggest company, which can produce 12 million tons a year. In Russia, a merger between two major potash miners, Silvinit and Uralkali, is under negotiation as well.

With the global population growing by 75 million a year, food demand will put further strain on harvests, increasing the need for fertilizer. Consolidation among producers of potash, a form of potassium used to boost crop yields by helping plants withstand dry conditions, has set off alarms with the big importers. "India has limited land to support a large population and any attempt to monopolize and increase fertilizer prices would affect productivity," says U.S. Awasthi, managing director of the Indian Farmers Fertiliser Cooperative (IFFCO), which buys from PotashCorp, among others. "Food prices will go up."

A fivefold surge in potash prices in 2007 and 2008 led to at least eight class actions filed in U.S. courts by farmers and farm suppliers against the leading producers over alleged collusion, a claim the producers deny. (The suits are ongoing.) Potash was among the last commodities to plunge in the global recession. PotashCorp used just a third of its capacity last year, while none of its seven largest rivals used more than 80 percent, according to the company and Fertecon, a U.K.-based industry consultant and price monitor. Prices hit a record of about $1,000 a metric ton for spot deliveries in 2008. They have since fallen to as low as $350.

The mergers could increase the clout of the trading companies that market and ship potash on behalf of most of the world's producers. Canpotex is the trading company for PotashCorp as well as another Canadian producer and Mosaic (MOS) of the U.S.: It accounts for 40 percent of global trade. Belarusian Potash handles trade for the producer in Belarus and Uralkali of Russia. While Belarusian Potash controls about 30 percent of global exports, that figure would rise to more than 44 percent if Uralkali merged with its Russian rival.

Belarusian Potash alone could end up managing a greater portion of sales in its industry than OPEC, 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. "It's a classic oligopoly," says Barrie Bain, director of Fertecon. While BHP has said it wants to sell its own potash and not join Canpotex, Bain says that BHP is unlikely to do so in the short term. Such a move would weaken the marketing power of Canpotex and put downward pressure on prices.

Potash and oil aren't the only concentrated markets. Coca-Cola (KO) controlled 47 percent of the world's soda market while PepsiCo (PEP) had 21 percent in 2007, according to Euromonitor International. Gillette, a unit of Procter & Gamble (PG), has a 72 percent market share in razors. "Gillette's monopoly does irritate me, but I can always grow a beard," says Eric Kraus, head of strategy at brokerage Otkritie Financial 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 countries that rely heavily on potash are figuring out their response to the increased concentration in the industry. India, which imports all the 5.6 million tons of potash it needs annually, will resist any price moves above the current $380 a ton, says IFFCO's Awasthi. Brazil has mandated Rio de Janeiro-based mining giant, Vale, (VALE) to start developing its own potash deposits. The company said in August it would invest $12 billion by 2014 to become the world's No. 2 in potash and phosphate.

China, alongside India, has shown interest in buying part of Belarus' state potash miner and said on Oct. 9 that it had uncovered new potash resources at home. China, the largest potash importer in 2008, needs to supply food for 22 percent of the world's population while possessing less than 10 percent of the globe's arable land. "The risk of sovereigns getting involved and building big mines is real," says Xavier Majic of Passport Management, a San Francisco-based fund. "There are assets out there big enough to disrupt this industry."

The bottom line: BHP's bid for Canada's PotashCorp is just one of several deals that could increase the clout of a few industry players.

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