‘The end of the potash world as we know it’ is no exaggeration – by Peter Koven (National Post – July 31, 2013)

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For the potash industry, this would change everything.

If Russian producer OAO Uralkali follows through on its plan to max out production and collapse one of the sector’s two trading arms, the industry’s oligopoly-like business model is thrown out the window.

The days in which the potash producers withheld production to maintain pricing influence could break down completely. Instead, experts said the stage would be set for a dramatic battle for market share, with the companies running at much higher production capacity and selling far more product. Higher supply would mean lower prices, greater competition and a culling of higher-cost producers and eager new entrants.

In short, the potash business would start to resemble a normal commodity business. BMO analyst Joel Jackson called it “the end of the potash world as we know it,” which is no exaggeration.

Markets were rattled at that prospect. Shares of every potash producer in the world plunged on Tuesday as investors absorbed the idea of global prices falling by US$100 a tonne or more. The losses moderated in the afternoon amid speculation that Uralkali may pull back on its plan. Potash Corp. of Saskatchewan Inc.’s shares fell 16% with a whopping 27 million shares changing hands.

Uralkali’s announcement was extraordinary, both because it proposed a plan to blow up the industry, and then carefully quantified the impact.

The Russian company said it is breaking up the potash marketing venture Belarusian Potash Co. (BPC) because its partner Belaruskali was selling additional potash outside of BPC. If Belaruskali would not maintain sales discipline, Uralkali saw no reason to do it either.

As a result, Uralkali plans to produce at its full capacity of 13 million tonnes a year, significantly above the 10.5 million tonnes it is currently producing. A company spokesperson told the Financial Post that it expects rivals to follow suit and boost production, which could push prices below US$300 a tonne this year. They are currently above US$400, meaning the drop could be in excess of 25%.

“Being the lowest-cost producer with highest potash capacity, having the ability to supply to China by rail, we hope to increase our share in all major markets,” the spokesperson said.

Currently, global potash exports are dominated by two trading companies: BPC and Canpotex Ltd., which is controlled by the Saskatchewan producers Potash Corp., Agrium Inc. and Mosaic Co.

For the rest of this article, click here: http://business.financialpost.com/2013/07/30/potash-uralkali-prices/

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