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Global potash industry: Profit from its consolidation

Tony D'Altorio
1 Comment|January 12, 2011

Fertilizer industry is both a superb growth story and unfriendly towards new competition because of the scarcity of raw materials

For years, investors turned their noses up at the potash industry. They paid the key fertilizer ingredient little mind until the global food crisis of 2007-08 hit.

In mid-2008, at the height of that mess, potash prices spiked to nearly $1,000 a ton. Yet just two years before, it barely managed to hit $150.

Today, potash is a hot commodity once again. Rising incomes in emerging markets have changed eating habits, increasing demand for foods and thus for fertilizers.

Last week especially, Russia, only one of 12 potash-producing countries, took the spotlight. So when its two biggest potash producers – Uralkali and Silvinit – decided to merge, investors took notice.

Uralkali is paying Silvinit $1.4 billion in cash for a 20% blocking stake and a swap for the remaining shares. Russian billionaire Suleiman Kerimov, who has controlling interests in both, set the terms.

The combined company will be the world’s second largest potash producer by volume, with a market value of nearly $24 billion. Only Potash Corporation of Saskatchewan (NYSE: POT) can claim more.

This merger follows BHP Billiton ADR (NYSE: BHP)’s $40 billion takeover bid for Potash. Though the Canadian government blocked that attempt, this latest move shows a larger industry push towards consolidation.

As usual with such deals, some win and some lose. In this, fertilizer companies win big…

Legal potash cartels

For decades, the world’s top fertilizer companies exported their potash through two marketing groups. These organizations – or legal cartels – work out annual contracts with importing nations, the three biggest of which are China, India and Brazil.

Forcing production to meet demand, they keep prices high like OPEC does with oil. Also similarly, they don’t have to worry about antirust action thanks to arcane rules.

One of the two marketing organizations, Canpotex, sells potash outside North American for Potash, Agrium (NYSE: AGU) and Mosaic (NYSE: MOS).

Belarussian Potash Company deals with UralKali and Belaruskali of Belarus. And now with the Uralkali merger, Silvinit may be able to join as well.

That would further increase its firepower in negotiations with countries like China.

Together with Belaruskali, the merged companies would control about 35% of the global potash export market. Meanwhile, Canpotex controls another 25% total… giving the cartels a whopping 60% control in all.

In other words, it’s a classic oligopoly with just a handful of major suppliers. Any change in the status quo – which doesn’t happen often – upsets that stronghold.

Rise of potash prices

Potash prices fell from their 2008 highs when farmers cut back during the global financial crisis. But they’ve started back up, with the latest quarterly contracts showing major consuming countries paying close to $400 a ton once again.

Industry insiders see demand and prices rising more in 2011, along with other agricultural commodities. So farmers have good reason to plant more and use more fertilizer per acre.

Pavel Grachev, CEO of Uralkali says he sees only “price strength next year. There is no possibility of prices going lower or even staying the same.”

Spoken like a true cartel member that controls production and prices.

On the other hand, emerging markets prioritize agricultural growth to ensure food security. And rising potash prices make achieving that growth difficult.

That’s why Chinese companies considered counter-bidding for Potash against BHP Billiton’s takeover attempt. But really, they should have been helping.

If it had succeeded, BHP would have produced as much potash as it could. Fertilizer companies would have then had to compete on prices for the first time since 1972.

In that case, the Cantopex cartel would likely break, lowering global potash prices… just as China wants. But now the cartels are stronger than ever, benefiting fertilizer companies, not emerging nations.

Current shareholders of Potash, Agrium and Mosaic really win out. The fertilizer industry is both a superb growth story and unfriendly towards new competition because of the scarcity of raw materials.

Add in the existing oligopoly, and potash producers win out every time.

Disclosure: The author does not hold positions in any of the stocks mentioned  

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This story is 2.5 years old. Really StockHouse? Really?
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