Potash Group Surviving Demise of Russian CompetitorLiezel Hill and Christopher Donville
The breakup of a Russian-led potash marketing venture won’t end the export partnership managed by North America’s three largest producers of the crop nutrient.
Potash Corp. of Saskatchewan Inc., Mosaic Co. and Agrium Inc., which together account for about 38 percent of global potash capacity, are poised to continue managing supply to bolster prices. OAO Uralkali, the biggest producer, yesterday ended its marketing venture with Belarus and projected it will boost output next year by 24 percent, which may lower prices.
Canpotex, which becomes the largest potash marketing group following the demise of its Russian-led counterpart, “will continue to do what it does,” Mosaic Chief Financial Officer Larry Stranghoener said yesterday in a telephone interview. “It’s an organization of great value to its member organizations and to our customers.”
Shares of Potash Corp., Mosaic and Agrium fell for a second day. They plunged as much as 26 percent yesterday after Uralkali said it would exit the export marketing group Belarusian Potash Co. and increase output to full capacity. While Uralkali may grab market share, North American producers will probably maintain Canpotex because it’s less expensive for them to handle exports together, said Mark Gulley, a New York-based analyst at BGC Partners LP.
“Canpotex is really all about logistics,” Gulley said yesterday in a telephone interview. “It’s all about economies of scale to get the product from the Saskatchewan mines to a port and to destinations.”
Uralkali’s move to stop cooperating with Belaruskali and increase annual production to 13 million tons next year from 10.5 million may reduce prices to less than $300 a ton, according to Uralkali Chief Executive Officer Vladislav Baumgertner. That would be at least 25 percent below the latest contract price for China and the lowest since January 2010.
Canpotex’s three owners’ potash production capacity accounts for about 38 percent globally, according to data compiled by Barclays Plc. The bank estimates capacity is about 66.4 million metric tons.
Canpotex negotiates fixed-term supply contracts with customers outside of North America on behalf of its members, and also handles export logistics. That means the potash companies don’t compete with each other overseas.
Leah Laxdal, a Canpotex spokeswoman, didn’t return a call seeking comment.
Potash isn’t traded on public exchanges. Prices for potash for delivery at Vancouver’s port have fallen to $410 a ton, 19 percent less than a year earlier, according to data from Green Markets, a fertilizer-industry information provider that is a unit of Bloomberg LP, the parent of Bloomberg News. The average retail potash price in 11 U.S. states has fallen 12 percent in the past year to $608.33, according to Green Markets.
Potash producers in Canada and the former Soviet Union accounted for 56 percent of world supply last year, according to Green Markets.
“It’s important to take a long-term view of the business and not overreact to today’s events,” Bill Johnson, a Potash Corp. spokesman, said yesterday by phone from Saskatoon, where the company is based. “We will continue to keep an eye on the situation and work with our customers in the interim.”
Potash Corp., which got 41 percent of its revenue last year from potash, dropped 17 percent yesterday in New York, the most since October 2008, as analysts cut ratings, target prices and earnings estimates. Peter Prattas, a Toronto-based analyst at Cantor Fitzgerald LP, lowered his rating to hold and reduced his per-share earnings estimate by 6.3 percent for 2013 and 13 percent for 2014.
Potash Corp. fell 8.3 percent to $29 today at the close in New York.
Agrium plans to continue with its “normal course of operations,” Richard Downey, a company spokesman, said yesterday in an e-mail.
“Comments made by Russian producers have clearly created uncertainty in the potash market,” Downey said. “It is important not to overreact to a single statement from one player in the industry.”
Agrium, which is based in Calgary, fell 1.7 percent to $85 at the close in New York. Mosaic, based in Plymouth, Minnesota, declined 6.2 percent to $41.09.
“We believe potash earnings estimates will move materially lower,” Joel Jackson, a Toronto-based analyst at Bank of Montreal, said in a note. “We expect a major exit by investors out of potash producers.”
The members of Canpotex must decide whether a strategy of controlling supply to bolster prices can still be effective without BPC doing the same thing, said John Chu, a Toronto-based analyst at AltaCorp Capital Inc.
“Do they try to shut down more production in response to Uralkali increasing production? Possibly,” he said by phone yesterday. “The question becomes whether Canpotex, which represents 25 percent of the export trade market,” can have a meaningful influence on prices.
North American producers will probably reduce potash exports, given their past approach to supply management, Raymond Goldie, a Toronto-based analyst at Salman Partners Inc., said in a note yesterday. There’s also doubt that Uralkali can increase its production to the promised 13 million tons, Goldie said.
Even if existing mine output isn’t curtailed, Uralkali’s move makes it less likely that expansions and new mines, such as BHP Billiton Ltd.’s Jansen project in Canada, will go ahead, Prattas said.
A spokeswoman for BHP declined to comment yesterday.
“The potash industry was largely ruled by the strength of that duopoly, being Canpotex and BPC,” Prattas said. “If there’s a crack in that duopoly then it threatens the whole playbook that the potash producers have.”
Potash Corp. last week cut its full-year earnings forecast after a drop in prices for its namesake crop nutrient.
Prices for potash, a crop nutrient that helps strengthen plant roots and improve resistance to drought, are down because of plentiful producer inventories and historically low import volumes in India. The company said it sold potash for an average price of $356 a metric ton in the second quarter, compared with $433 a year earlier.
The U.S. is the biggest importer of potash, about 90 percent of which comes from Canada, according to Neil Fleishman, a potash-industry analyst at Green Markets. The U.S., Brazil and China account for about 60 percent of global potash imports, he said.
Potash Corp., Agrium and Mosaic still have a geographic advantage in North America, Goldie said.
“The interior of North America is protected against the incursion of Russian and Belarusian potash by transportation costs which, for potash, are high relative to the value of the product,” Goldie said.