Analysis: Bruised potash sellers may lift curbs on output

Karnalyte Resources

12/02/2013 18:00

* Uralkali sees new plan if market share drops 
    * Balance between price, volume needed-Agrium 
    * Cutting price could lift sales, stymie rivals 
 
    By Rod Nickel 
    WINNIPEG, Manitoba, Feb 12 (Reuters) - The world's top 
potash producers may abandon attempts to rein in output to keep 
prices high, switching to a strategy of ramping up sales as they 
face rising competition and big buyers of fertilizer take an 
increasingly aggressive stance.     
    Such a shift would change the game for the giant North 
American and Russian-Belarusian producers, which export the 
fertilizer through Canpotex Ltd and Belarusian Potash Co, 
respectively. 
    Instead of reining in output to support prices, and then 
selling potash to big buyers in contracts that set a benchmark 
for other deals, the miners might maximize sales through 
marketing organizations in what some see as a throwback to 
cartels of the past for commodities such as coffee, rubber and 
tin. 
    By boosting sales volume, the established producers could 
drive down prices to the point where opening new potash mines 
might make no sense for competitors. 
    Canpotex and BPC account for about 70 percent of world 
exports. If that dropped to 50 percent as competitors open new 
mines, "reasonable economic players" will simply not implement 
the current strategy stressing price rather than volume, 
Vladislav Baumgertner, chief executive of Russia's Uralkali OAO 
  , told Reuters in an email. 
    "In this situation, we will look more like traditional 
industries: the main competitive advantage will be the 
production costs and the cost of capacity expansion," he said,   
  warning that the addition of any more potash from newly opened 
mines could overload the market. 
    Canpotex and BPC, and the producers behind them, face supply 
challenges from new mines planned by BHP Billiton Ltd   , 
K+S AG    and a raft of junior players, as well as 
pressures from buyers smelling an opportunity to seek deals on 
more favorable terms. 
    But Baumgertner said he doubted that many of the proposed 
mines will get built, because potash prices are too low to make 
them viable. 
    Demand for potash, a nutrient that improves yields of corn, 
rice, palm and other crops, boomed in the past decade as diets 
and incomes improved in developing countries and demand for food 
rose. 
    Prices soared in 2008, prompting an unsuccessful, $39 
billion bid for Potash Corp of Saskatchewan   , the 
world's biggest producer by capacity, from global mining giant 
BHP Billiton.    
    They fell back in 2009 and bottomed out in 2010 as farmers 
balked at sky-high prices. Potash recovered modestly in 2011 
before drifting lower last year. While most in the industry 
continue to see strong demand growth long into the future, some 
question whether there is too much new capacity being readied, a 
case that has gained momentum with the current lackluster 
prices. 
    Spot prices for potash are now around $460 per tonne, well 
below the price of $550-$600 that Mike Wilson, CEO of No. 3 
Canadian producer Agrium Inc   , sees as needed if new 
entrants are to make money. 
    "Every one of these (potential rivals) are getting their 
capital cost reports and they're cringing," Wilson told Reuters 
in an interview. "They're sitting there choking." 
 
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    Global potash exports:      
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    A BHP spokesman declined to comment on what potash price it 
requires for the board to give final approval to its Jansen, 
Saskatchewan mine, but pointed out that hundreds of people 
continue to work on building the project. 
    While the new mines pose big questions about the future of 
the market, the present hasn't been so hot either. 
    China and India, the two big importers whose purchases 
traditionally set a floor for global potash prices, stayed out 
of the market for much of 2012's second half, bruising Potash 
Corp's balance sheets. 
    Deals that China and India eventually signed included steep 
discounts on big volumes, and the two are also taking small 
steps to loosen their dependence on Canpotex and BPC with deals 
to buy future mined potash from upstarts Prospect Global 
Resources Inc    in Arizona and Karnalyte Resources Inc 
   in Saskatchewan, respectively. 
    But existing producers still have advantages against new 
entrants, because it's cheaper to expand existing mines than to 
build new ones. 
    Shifting the priority to volume from price would be ironic 
for Potash Corp, given that concern about the BHP bid for Potash 
Corp centered partly on fears that BHP would not curb output and 
weaken Canpotex, which handles sales of Saskatchewan potash from 
Potash Corp, Agrium and Mosaic Inc   . 
    BPC handles sales for Uralkali and Belaruskali. 
    "You've got to get some wind back in your sails to get 
prices back moving up," Potash Corp Chief Executive Bill Doyle 
said of his own company on a Jan. 31 analyst call. "Of course, 
the wind for us is volume. We focus so much on price, but you've 
got to have some volume coming back in the market."  
    Potash Corp shut several mines for weeks at a time this 
winter, seeking to match supply to demand.  
    But Agrium's Wilson said a lower price is no guarantee of 
extra sales. "We've got to strike the right balance," he said. 
    Canpotex member companies say they do not co-ordinate 
production to set prices, the traditional mark of a cartel. But 
they conduct off-shore sales and co-ordinate transportation 
through Canpotex in an arrangement that critics say is cosy. 
    "It's not a clear-cut situation," said Mike Burt, director 
responsible for industrial economic trends at the Conference 
Board of Canada. "I can't really say what's going on inside the 
organization. The public statements are that the companies are 
setting their own production. But it's obviously a fairly close 
relationship."  
    He said the global potash trade might best be described as 
an oligopoly, dominated by Canpotex and BPC. It can be compared 
to the iron ore sector a few years ago, when a few big producers 
set market prices with Japanese steel buyers. 
    That situation changed when China became the world's 
dominant buyer, and BHP Billiton switched to a strategy of 
maximizing volume, establishing itself as the low-cost producer. 
    Canpotex declined requests for an interview. 
     
    BARGAINING CLOUT 
    Canpotex and BPC struggled in 2012 to maintain their 
bargaining clout. 
    With China and India on the sidelines, North American potash 
supplies ballooned to 37 percent over the five-year average in 
December. And while Potash Corp does not see many of the planned 
mines getting built, it still expects global capacity to grow 24 
percent to 77 million tonnes by 2017. 
    BHP is digging two mine shafts in Saskatchewan for what 
would be the world's biggest potash mine, ahead of a final board 
decision this summer. Germany's K+S    started work on 
its mine in the Canadian province last summer. But Vale SA 
   recently delayed projects in Canada and Argentina.  
    In a recent report, Scotiabank analyst Ben Isaacson said a 
volume-over-price strategy could help Potash Corp by frightening 
away competitors and reducing the per-tonne cost of production. 
    "Perhaps one of the most important benefits of dropping 
potash prices to the low $300s (per tonne) would be that the 
continued spending of capex by almost all greenfield sponsors 
would no longer make sense. We believe the majority of 
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