PotashCorp Eager to Increase its Market Share

Potash Corporation of Saskatchewan’s (TSX:POT,NYSE:POT) bid for Israel Chemicals (TLV:ICL) could see the Saskatchewan-based company — and its export marketing arm, Canpotex — expand its already dominant position in key fertilizer markets. But negotiations are still taking place and some Israelis do not support PotashCorp’s plan. 

Israel Chemicals’ locally operated Dead Sea potash plant is just one issue that has been highlighted by Israeli politicians and labor advocates worried about the potential takeover. Specifically, they are concerned about the prospect of moving the plant across the border to Jordan, where PotashCorp holds a 28-percent stake in Arab Potash Company.

The proposed acquisition has been under the scrutiny of the Israeli government since the deal was announced late last year. The Israeli government’s so-called “golden share” in Israel Chemicals gives the government a veto vote that could stop PotashCorp from gaining the minimum 51-percent stake it is seeking.

The review process has slowed significantly since Israel’s January election; a new Israeli coalition government — a combination of center- and right-leaning parties — is expected to be announced by current Israeli Prime Minister Benjamin Netanyahu by no later than Saturday, according to The Jewish Voice. A decision on the acquisition may not follow until some time after.

However, PotashCorp’s CFO, Wayne Brownlee, assured the audience of the Bank of America Meryll Lynch 2013 Global Agriculture Conference in late February that the Israeli government review process “is not on hold, it’s not frozen, it’s not suspended,” Bloomberg Businessweek reported.

In which nation’s interest?

This is not the first time that a proposed deal involving PotashCorp has become an issue of national concern.

A hostile takeover bid for PotashCorp launched by BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT) in 2010 raised questions about the “net benefit” of the deal for the Canadian economy, with the Canadian government ultimately shutting the deal down.

The shoe is now on the other foot: PotashCorp’s bid for Israel Chemicals is undergoing a similar analysis by Israel’s transitioning government.

But beyond its potential national implications, the proposed deal will also have an effect on fertilizer markets and agribusinesses worldwide.

Buyer nations such as China, India and Brazil will have much to consider if Canpotex’s potash market share expands beyond its current level.

Andrew Benson, an analyst with Citigroup (NYSE:C) in London told the Financial Times that the addition of Israel Chemicals’ potash assets would bump Canpotex’s market share to about 95 percent in India and China and 80 percent in Brazil.

These three emerging economies will be forced to remain price takers if the oligopolic potash market structure continues to solidify.

The role for junior potash

Buyer countries like India and Chain have, however, been taking strides to reduce their reliance on North American and Belarussian cartel suppliers through financing or entering into joint ventures with independent junior potash producers.

In January, Indian state-backed firms announced a financing and offtake agreement with Karnalyte Resources (TSX:KRN), while a similar deal remains in the works with Saskatchewan-based Encanto Potash (TSXV:EPO).

Arizona-based Prospect Global Resources (NASDAQ:PGRX) also agreed last year to supply potash for a 10-year term to China’s Sichuan Chemical Industry Holding Group Company in exchange for $100 million and a stake in the project.

“This is a great opportunity for the buyer side because those guys consume huge amounts of product and they are prisoners of the big two distribution groups from Canada and Russia,” Patricio Varas, CEO of Western Potash (TSX:WPX), told Reuters earlier this month on the sidelines of the PDAC mining convention in Toronto.

Rabobank analyst Rakhi Sehrawat told Agrimoney.com that she believes investing and developing independent greenfield potash projects will be a likely strategy for large buyers looking to secure long-term supply.

“To secure long-term supply at a reasonable price, it has become imperative for large potash importers to facilitate supply development … by pumping in financing, entering supply contract agreements, or acquiring existing mines,” she said.

Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.

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