Uralkali Breaks Potash Cartel to Grab Market Share on Price

July 30, 2013 06:37 AM
Uralkali Breaks Potash Cartel to Grab Market Share on Price

OAO Uralkali, the world’s largest potash producer, upended the $20 billion-a-year industry by ending limits on production that underpinned prices and halting cooperation with Belarus that controlled supplies from the former Soviet Union.

The decision sent shares of potash producers plunging as much as 27 percent from Israel to Germany to Canada and the U.S. as investors speculated a flood of supplies will lead to prices will sink for potash, a soil nutrient that strengthens plant roots. Uralkali, part-owned by billionaire Suleiman Kerimov, said it exited the venture after Belarus undermined the sales agreements.

"Uralkali’s announcement completely turns the global potash market upside down," Elena Sakhnova, a VTB Capital analyst in Moscow, said by phone. "If previously global potash producers were acting like an oligopoly, working with the rule that benefited higher potash prices over shipped volumes, now the market will be fully competitive."

Uralkali’s venture and a group comprising Potash Corp. of Saskatchewan, Mosaic Co. and Agrium Inc. played off each other, moderating output and exports along with demand to prevent price swings.


Trading ‘Deadlock’


Uralkali shares fell as much as 25 percent, the most since November 2008, and traded down 17 percent at 154.93 rubles by 5:45 p.m. in Moscow. Trading was suspended for a half hour after shares crossed the 20 percent threshhold. K+S AG shares plummeted as much as 27 percent, the most in 15 years, and Israel Chemicals Ltd. fell 18 percent in Tel Aviv. Potash Corp. and Mosaic each dropped 23 percent in New York, while Agrium declined 8 percent.

Uralkali plans to switch exports to its own unit, Uralkali Trading, from Belarusian Potash Co., a joint venture with Belaruskali set up in 2005 to bolster their market position. Cooperation reached "a deadlock" after Belarus’s government canceled BPC’s exclusive right to export the nation’s potash and Belaruskali exported the fertilizer ingredient on its own, the Berezniki, Russia-based producer said in a statement.

Filipp Gritskov, a BPC spokesman, declined to comment, as did Olga Dolgaya, a spokeswoman for the government of Belarus.


Lowest Costs


"We see the potash price may fall below $300 a ton after the change in our trading policy," Uralkali Chief Executive Officer Vladislav Baumgertner said. That’s at least 25 percent below the current contract price for China and the lowest since January 2010. The price will remain higher than $200 a metric ton, the production cost level for some international producers, he said.

Uralkali, which has the lowest production costs among international peers, will run at full capacity next year, Baumgertner told reporters by phone. Output will rise to 13 million tons in 2014 from 10.5 million tons this year, he said. Uralkali’s production cost is $62 a ton, compared with more than $100 a ton for North American producers and almost $240 in Europe, according to a company presentation in July.

Other global producers will be hurt more than Uralkali, which will be cushioned by increasing sales volumes, Sakhnova said. It is the only potash producer that can ship potash by rail to China, the largest consumer of the soil nutrient, and it may hinder Belarus’s reach into the market, she said.


China Supplies


Rail deliveries to China will reach as much as 2.5 million tons of potash annually, Baumgertner said. Uralkali forecasts stable revenue on increased sales volumes and will keep its dividend policy unchanged, he said.

Uralkali will extend its first-half supply contract with China through December, meaning it will ship as much as 500,000 tons more potash to the Asian market by the end of the year, Baumgertner said. The price may be cut from the current $400 per ton, he said.

China’s current spot price of $350 a ton may "to some extent" be considered a target this year, he said.

Uralkali hadn’t planned to renew the China contract this year, hoping to sign a new agreement in October or November at a price no lower than the current level, according to a statement from Baumgertner on May 29. At the time, it also cut railway shipments by about two-thirds to get a higher price.

Uralkali has fallen 32 percent since July 19, as it wound down a $1.6 billion buyback program after spending $1.25 billion, according to a July 22 statement. Goldman Sachs Group Inc. cut Uralkali to hold July 24, a day before VTB Capital reduced its rating on the stock to sell.


Billionare Sales


Anticipating the shift in trading policy will create volatility in the share prices of all global potash producers, including itself, Uralkali said it has frozen the buyback program and won’t make a tender offer for its stock by the end of the year, according to Baumgertner. Last month, Baumgertner said that the board in November may consider more stock purchases so that major shareholders could participate.

Billionaire Alexander Nesis sold off his 5.1 percent stake in Uralkali, the company said July 26, two weeks after the company completed buying out shareholder Zelimkhan Mutsoev for $1.3 billion.

Uralkali also decided against proceeding with its Polovodovskoye greenfield development because of the potential changes in the potash market, Baumgertner said.

"No longer does Uralkali plan to follow a price before volume strategy," analysts at Liberum Capital Ltd., led by Sophie Jourdier, said today in a note. "We expect global potash prices to fall."




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