The global potash industry is a highly profitable one, known for its high margins and high barriers to entry; the former has attracted the investments of high-profile mining companies Rio Tinto (RIO) and BHP Billiton (BHP). This, along with the disbanding of the Belarusian Potash Company has brought about concerns of the stability of the global potash market. The market was formerly dominated–and pricing was more or less controlled–by two informal cartels, the Belarusian Potash Company and Canpotex. Following the disbanding of the former, the competition for pricing power and market share has intensified, and many fear that this will lead to an oversupply in the market.
Russian potash producer Uralkali withdrew from the Belarusian Potash Company in the summer of 2013 and stated its plans to gain market share through increasing production. It seemed to achieve this, as its potash sales grew from 9.9 million tons in 2013 to 12.3 million tons in 2014, resulting in a slight gain in market share. As what market observers had expected, the price of its exports fell approximately 13% in 2014 as prices tumbled following the deconsolidation. On the surface, potash producers appear to be more price takers than they ever have been, at least to a degree.
Another sign of the deterioration in pricing power came earlier in 2015, as the other half of the former Belarusian Potash Company, Belaruskali, agreed to terms with China at subpar prices. For the past decade or so, the price that China, the world’s largest consumer of potash, pays for potash is used as the market benchmark and is typically set at the beginning of the year. This year, however, higher inventories and falling domestic prices allowed Chinese buyers to string negotiations along well into March, raising concerns over China’s global influence. Though the price of the agreement was $315 per metric ton, a ~$10 increase from 2014 price levels, competitors had been expecting a $25-$30 increase in prices in 2015.
A more competitive market as players strive to maintain market share should probably be expected following one that had essentially been a duopoly. Potash Corporation (POT), the largest member of Canpotex, has looked to grow via acquisition to attempt to advance its market share and pricing reslience. The firm’s $8.8 billion bid for German potash producer K+S was rejected, but the company did leave the door open for a higher bid from Potash. The combined company would be the global potash sales leader, based on 2014 numbers. If the merger were to take place, the resulting rationalization would be a win for the remaining Canpotex members Mosaic (MOS) and Agrium (AGU), as well as the potential newcomers into the Canadian potash market, BHP Billiton and Rio Tinto.
However, some potential benefits emanating from the deal may be mitigated by looming oversupply in coming years. The Russian and Belarusian potash companies continue to fight for market share and seem to have reduced concern for pricing resiliency, as they count on the Canadian operators to eventually curtail production in the event of falling prices. They may be correct, but in the event that the global potash market does behave rationally over the next two years, BHP may provide a supply shock to the market between 2017 and 2020 when production could begin at its mine in Saskatchewan. The mine will be the world’s largest potash mine, capable of producing 8 million tons of potash annually.
Potash Corp estimates that global potash demand will increase at an annual rate of 2.5%-3.5% through 2019, the high end of which brings demand to the low “70 millions” by 2020. Estimates of supply, however, suggest that global potash capacity will near 100 million tons by 2020, creating a large mismatch. The increased production by existing players, particularly in Russia and Belarus, and the addition of new players could bring the supply well past these marks. Potash pricing will have an incredibly difficult time staying firm under these conditions. After skyrocketing during the financial crisis, benchmark potash prices have hovered around the $300 mark since the falling out of the Belarusian Potash Company, and market conditions are not signaling a rebound in 2015, or anytime soon for that matter.
From our perspective, the poor outlook on the potash pricing environment is not all that enticing. The days of the potash industry acting rationally are likely over, and we don’t see the market tightening any time soon. We are not looking to add exposure to such an environment, but Potash Corp may be one to keep an eye on, if only for its lofty dividend yield (its Dividend Cushion ratio is 0.8, however). We like that Potash has the potential to increase scale with the acquisition of K+S and has significant exposure to the phosphate and nitrogen markets, giving it slightly less concentration risk compared to a pure-play potash company such as Intrepid Potash (IPI).