Early this morning, Russian fertilizer Uralkali announced it will leave the Belarusian Potash Company in order to grab market share. CEO Vladislav Baumgertner asserted that BPC partner Belaruskali had been making potash exports outside of the pre-arranged agreement, rendering the BPC useless.
Until now, the potash industry had been a relatively stable cartel allowing industry participants to generate robust amounts of free cash flow as spot prices rested well above the cost of production. On a conference call following the announcement, Baumgertner mentioned that the price of potash could fall by over $100/tonne as Uralkali will boost production nearly 25% and look to steal market share. Uralkali is the largest single potash producer in the world and likely has the lowest cost position. Even worse, this could implore the North American cartel known as Canpotex to boost production in order to fight to retain market share, and we could see excess capacity become excess supply.
Without question, this event is materially negative for several firms in our coverage universe, including Potash Corp (click ticker for report: ), Mosaic (click ticker for report: ), Intrepid Potash (click ticker for report: ), and Agrium (click ticker for report: ). Intrepid Potash is particularly vulnerable, as it is essentially a one resource company. This will also no doubt have an impact on BHP (click ticker for report: ) and its decision to enter the potash market. Although BHP wasn’t going to join Canpotex, a material slide in spot prices could radically change the expected value of the Jansen project, rendering it unattractive.
On the other hand, some other agricultural firms might even become excited about a substantial decline in potash prices. Farmers will benefit the most from declining fertilizer prices, and with more money to spend on other upgrades, we could see more money allocated to equipment produced by Deere (click ticker for report: ), Caterpillar (click ticker for report: ), and AGCO (click ticker for report: ).
Valuentum’s Take
The overhang of BHP entering the potash market had already weighed on several fertilizer stocks, but this decision from Uralkali to end what has been an incredibly profitable business model is a bit of a surprise. In fact, we are confident that North American potash producers are doing everything in their power to talk Uralkali into rejoining the BPC. On the other hand, Uralkali has likely already received calls from China and India—two nations we believe are highly interested in potash at lower prices. Uralkali already announced that it will extend its potash supply agreement with China for the rest of 2013.
We have traditionally found the potash industry to be one of the most attractive commodity businesses thanks to the rational behavior of producers. But with rational behavior and discipline likely thrown out the window with this announcement, the potash industry has in one move become just another commodity. We’ll be monitoring future developments very closely going forward.
Chemicals – Agricultural: AGU, CF, CMP, IPI, MON, MOS, POT, SMG, TNH