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In a move that delivered a one-two punch to North American potash producers’ share prices, Russia’s Uralkali announced that it will no longer be selling potash through Belarusian Potash Company.
Moving forward, Uralkali will be directing its potash exports through Uralkali Trading, sparking concerns that the Russian fertilizer giant could flood the market with supply. Business Recorder reported that Uralkali will be increasing competition in the market, warning that prices could potentially tumble from the current $400 to $300 per tonne by the year’s end.
BPC had been selling potash for Urakali and Belaruskali for over eight years, and single-handedly controlled over 40 percent of the potash market. The decision to split from BPC comes from disagreements between Urakali and BPC over sales requirements.
What does this mean?
Up until Tuesday, the potash market was controlled by two cartels: Canpotex and BPC. Both players operated the potash oligopoly, working together to benefit from higher potash prices; however, with the disintegration of one of the cartels, investors should get ready for significant changes in the potash landscape.
Elena Sakhnova, analyst at VTB Capital in Moscow, told Bloomberg that “Uralkali’s announcement completely turns the global potash market upside down.” Sakhnova went on to explain that market watchers can expect more competition in the potash space.
Analyst Joel Jackson of BMO Nesbitt Burns explained in a research note that it is “the end of the potash world as we know it.”
Meanwhile, analysts at Integer Research do not expect to see much in the way of change with the new set up. “Prices might fall in the near term, but we do not expect to see a price war,” William Irwin wrote in a note.
The firm sees supply remaining highly concentrated throughout the industry without BPC, and while prices could fall in the short term, overall the expectation is “to see a continuation of the supply discipline which has distinguished potash from other commodity industries in the medium to long term,” Oliver Hatfield, director of fertilizer at Integer Research, said.
Saskatchewan could lose
Already economists are looking at the potential impact that Uralkali’s announcement could have on the economy, and it appears that Saskatchewan could be hurt the most by the fallout of the Russian potash cartel.
The Globe and Mail reported that potash accounts for 2 percent of Saskatchewan’s provincial economy. Potash makes up 1.3 percent of Canada’s exports overall.
With so much resting on the fertilizer, this new development could be significant for the Canadian province. “If we were to assume double-digit declines in potash production for the remainder of this year resulting in this mining component showing no growth for the whole year, it would reduce Saskatchewan GDP by 1 percentage point,” said Assistant Chief Economist Paul Ferley of Royal Bank of Canada.
Currently, RBC forecasts that Saskatchewan’s economic growth will be 2.9 percent for 2013.
Big players with bloody noses
North America’s largest potash producers were hit particularly hard by the news. Shares of Potash Corporation of Saskatchewan (TSX:POT,NYSE:POT) took a knock of nearly 25 percent on the news, tumbling to $28.70 before recovering some losses. Mosaic (NYSE:MOS) shares also stumbled, diving down 24.64 percent to $40.10. Agrium (NYSE:AGU) was down 13.05 percent, to $79.15, a drop of $13.11, but finished up higher at $86.50 in New York.
Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any company mentioned in this article.