Uralkali Deal Seen Failing to Mend Trust Among Potash Peers

Billionaire Mikhail Prokhorov’s planned purchase of a stake in OAO Uralkali opens the door to reviving a global marketing venture, while failing to restore potash prices undermined by mistrust and high stockpiles.

Prices for the key crop nutrient won’t rise significantly for a year or more, following a 30 percent slump, even if the Russian producer rebuilds the partnership with Belarus that used to control 40 percent of exports, Elena Sakhnova, a VTB Capital analyst in Moscow, said by phone yesterday.

Uralkali’s withdrawal from its trading joint venture with Belarus in late July and its plan to boost production, pushed potash to its lowest level since 2010. It shook the $20 billion market for the fertilizer ingredient and hurt the share prices of competitors including Potash Corp. of Saskatchewan Inc., Mosaic Co. and K+S AG.

“There’s no trust anymore among the members of the global potash oligopoly,” said Sakhnova, Institutional Investor magazine’s top-ranked Russian industrial analyst. “It’s hard to predict what the North American producers will do, even if Belarus and Uralkali are back together again.”

Potash stockpiles remain high, with Belarus alone reportedly holding about 1.5 million metric tons of the soil nutrient in warehouses in China and Brazil, Sakhnova said.

Belarusian Born

Uralkali fell 1.9 percent to 175.86 rubles by the close in Moscow today, after gaining 2.3 percent the previous day. Potash Corp. was little changed in Toronto yesterday after Onexim’s statement about the planned purchase of 21.75 percent from Kerimov for an undisclosed price. K+S was also little changed, while Mosaic declined 1.3 percent yesterday.

While the sale may satisfy President Aleksandr Lukashenko’s demand for ownership changes at Uralkali before starting talks about recreating the trading venture, the Belarus leader said last month he didn’t know Prokhorov or his business.

Onexim may be joined in an acquisition of the combined 33 percent stake held by Kerimov and his business partners by Belarusian-born billionaire Dmitry Mazepin, who controls another Russian fertilizer-maker, OAO Uralchem, three people with knowledge of the plans said.

The fact that Mazepin was born in Minsk didn’t play a leading role in Prokhorov’s choice of him as a partner, although it may “help a bit,” given that Mazepin is already in the fertilizer business, Kirill Chuyko, head of equity research at BCS Financial Group in Moscow, said by phone.

Create Deficit

The only way to make clients pay more now is to “almost completely halt production for some time to create a deficit,” which will lead to losses and won’t correspond with Lukashenko’s wishes, Chuyko said.

Uralkali’s press service declined to comment, as did Onexim.

Uralkali is working at full capacity and expects to sell 13 million tons of potash next year. Potash Corp. of Saskatchewan Chief Executive Officer Bill Doyle said last month that the Russian producer’s decision to expand sales volumes at the expense of prices has been self-destructive and the “dumbest thing” he has seen.

Even if Belaruskali and Uralkali regain control over a combined 40 percent of global potash exports, it won’t have a short-term impact on the market, Konstantin Yuminov, an analyst at ZAO Raiffeisenbank in Moscow, said by phone. “Prices started to fall since the start of the year, much earlier than Uralkali quit the joint trader.”

Chinese Prices

Potash prices in China, the largest consumer, have fallen to about $325-$330 a ton in the market for immediate delivery since the venture’s collapse, from about $345 a ton in July, according to Uralkali data. In Brazil, prices have dropped to $310 a ton, VTB Capital’s Sakhnova said.

“For a year to come, a formal return to the oligopoly could merely have the effect of containing the price collapse,” Sakhnova said. Lower prices were “accompanied by lower buying activity, which has left producers and the distribution chain sitting on high inventories which we estimate globally at 40 percent above normalized levels.”

A pick-up in sales suggests prices could advance next year, with any gain accelerated by potential consolidation among suppliers, Oleg Petrov, Uralkali’s chief of sales and marketing, said in an interview in Moscow on Nov. 1. He expects potash demand to grow to as much as 60 million tons next year, the highest level since at least 2003.

“It’s not easy to restore a partnership like that, it will take a lot of time,” BCS Financial’s Chuyko said. “Belarus’s economy has suffered from the break up and Lukashenko is likely to seek some kind of compensation, which may delay the process.”

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