Russia’s Uralkali rocks potash sector by pulling out of cartel

MOSCOW, Russia — Canadian potash producers, the Saskatchewan government and rural communities benefiting from the billions spent on new and expanding mines are trying to assess the impact of the breakup of a potash cartel in the former Soviet Union.

Russia’s Uralkali quit one of the world’s two big potash cartels July 30, heralding a price war for the key crop nutrient and pummelling the shares of companies that produce it.

The breakup of the Belarusian Potash Company (BPC), a joint venture with Belarus partner Belaruskali, leaves North America’s Canpotex as the dominant potash export venture.

The BPC joint venture started to crumble this year as rumours emerged that both companies were selling potash outside the partnership. The two firms previously denied those rumours.

Uralkali said it pulled out because Belaruskali had made key fertilizer ingredient deliveries outside the partnership.

The breakup could cause rivals to cancel new production projects if it leads to sustained lower prices, but it may also bring cheaper fertilizer to farmers, at least those in India and China.

“It is as if Saudi Arabia decided to leave OPEC; oil prices would fall immediately,” said Dmitry Ryzhkov, an equity sales trader at Renaissance Capital.

BPC and Canpotex usually settled for deals at similar prices when in negotiations with big buyers like India and China, and they had no qualms about turning off the supply spigot when buyers looked likely to gain the upper hand.

Canpotex members regularly curtail production to control inventory.

Together BPC and Canpotex accounted for almost 70 percent of global potash sales.

Uralkali now promises to raise production and sales, even as potash prices are already in decline. It plans to boost sales to 13 million tonnes in 2014 and 14 million in 2015 from 10.5 million this year by expanding market share in China, India and Brazil.

Weaker potash prices this year and rising construction costs had already caused some planned mine construction in Canada to be delayed or shelved.

A big question now is what BHP Billiton will do regarding its $14 billion Jansen project in Saskatchewan. The project is expected to produce eight million tonnes a year, which was 15 percent of global potash production last year.

That project, as well as expansions at existing mines and the new K&S Legacy project north of Moose Jaw, Sask., have pumped money, jobs and housing demand into a number of rural communities.

Royalties from potash production are also a significant contributor to Saskatchewan’s bottom line.

The province’s current budget forecast puts revenue from potash royalties at $520 million, or 4.5 percent of total provincial revenue of $11.6 billion.

Premier Brad Wall said the province would have to lower its royalty revenue forecast but added the reduction would be mostly offset by gains in other areas, including stronger than expected oil revenue.

Uralkali speculates that the breakup of its cartel could drive global potash prices down about 25 percent to around $300 per tonne, but that does not mean North American prices will fall that low.

For example, weak demand in 2010 pushed Potash Corp.’s average realized price for the year to $316, but that was a combination of a North American price of $364 and an off-shore price of $285.

This summer, potash retail prices in North America are well above $550 per tonne.


Stories from our other publications