Shares of North American potash producers fall on news of Russian rival's move

TORONTO – The potash sector took a major hit Tuesday amid fears that producers in Saskatchewan would be undercut by lower prices after a key rival in Russia pulled out of a cartel.

Uralkali, one of the world’s largest potash producers said it has decided to stop its export sales through the Belarusian Potash Company and direct all export volumes through its own Uralkali Trading.

Experts interpreted the breakup of the European potash cartel as a sign that Uralkali will be able to drive down the price of potash by as much as 25 per cent, affecting other rival producers in Canada and the United States.

“The market is concerned that the Russian potash suppliers may undercut prices in the market place,” said Patrica Mohr, a commodities expert with Scotiabank.

“The demand for potash around the world should actually be quite strong because grain prices remain quite strong in Brazil, in the United States,” she said.

“But potash buyers sometimes delay purchases if they think that prices are going to go lower, so I think this is a somewhat unsettling development in the potash market.”

PotashCorp is the largest and best-known of North America’s potash producers and the largest partner of Canpotex, a company set up to market the three companies’ products in export markets such as China.

PotashCorp, Mosaic and Agrium all have major potash operations in Saskatchewan, which has one of the world’s largest deposits of the mineral — a main ingredient used in fertilizers used to promote crop growth.

The mineral is key to that province’s economy, and the suggestion of a possible slide in that market raised questions about what impact may be felt by Saskatchewan or even the Canadian economy as a whole.

“It is too soon to know the potential impact of today’s announcement by OAO Uralkali on price, production and provincial potash revenues here in Saskatchewan,” said Kathy Young, a spokesperson for the office of Saskatchewan Premier Brad Wall.

“We will be monitoring these developments closely and speaking with Saskatchewan potash producers to gain a better understanding of the potential impact. We will also be evaluating the potential impact on potash revenues, which will be reflected in the first quarter financial report when it is released in August.”

Bill Johnson, a spokesman with PotashCorp, said the company was still assessing the situation and gathering all the facts.

For the moment, it’s operating as usual and continuing with its expansion in the province, as well as speaking with its customers so they understand the situation.

But CIBC economist Avery Shenfeld noted the possible economic impacts of lower potash volumes, saying that since potash production makes up just about under a half per cent of Canadian GDP, and represents about 1.5 per cent of Canadian goods exports, a drop of 25 per cent in volumes in the third quarter as buyers sit and wait for lower prices would entail a drop of about 0.1 per cent in real GDP, or roughly 0.4 per cent at annual rates.

Volumes should rebound in the fourth quarter, however, as the lower prices bring the buyers out to complete contracts.

“These are `back of the envelope’ type figures, but give a sense that potash volume swings can indeed have a meaningful, if not massive, impact on Canadian quarterly GDP data, as they did in the latter half of 2012,” Shenfeld wrote in a note to clients.

A spokesperson for Uralkali said Tuesday that the company expected competition on the potash market to increase once the firm starts selling through its own trader and working at full capacity, and that should put pressure on the price to possibly go to under US$300 per tonne by the end of 2013.

“Still, the price is likely to remain higher than US$200 per tonne, which is the cost of production for marginal potash producers,” the company said in an e-mail.

Scotiabank’s Mohr said she considered the US$300 per tonne price “rather low,” and expressed doubts prices could reach those levels.

“The potash market is quite concentrated though, so even if they (Uralkali) do sell outside the marketing arrangement that they’ve been a part of in the past, it remains really quite a concentrated market,” she said.

“The market has been waiting for a second half contract agreement with China and that price had been expected to roll over at about US$450 per metric tonne delivered into China, so we’ll just have to see what happens now.”

The CEO at Uralkali said in a statement posted on the company’s website that the Russian company has supported a united sales network but that has been upset by a Belarusian presidential decree in December and sales by Belaruskali outside the marketing partnership.

“Unfortunately, we should state that our cooperation with our Belarusian partners within BPC framework has come to a deadlock,” Vladislav Baumgertner said in a statement.

He said Uralkali had “repeatedly informed” its Belarusian partners that such actions “were unacceptable and they have ultimately destroyed the fundamentals of our prolonged fruitful cooperation.”

“In this situation we have to re-direct our export deliveries through our own trader,” he said, adding he wouldn’t exclude the possibility of cooperation on a mutually beneficial basis in future.

Canada’s largest potash producer, Saskatoon-based PotashCorp. (TSX:POT), was down 18 per cent mid-afternoon on the Toronto Stock Exchange, trading down $7.09 to $31.81 after going as low as $29.78.

Its partners in the Canpotex potash marketing group were also down, with U.S.-based Mosaic (NYSE:MOS) falling nearly 18 per cent to US$43.42 and the more diversified Agrium (TSX:AGU) taking a smaller hit, dropping 4.4 per cent to US$89.50.

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