New PotashCorp CEO shows confidence in ‘price over volume’ strategy
On July 1, Jochen Tilk formally replaced outgoing Bill Doyle as the CEO of PotashCorp. Doyle headed the Saskatchewan based PotashCorp for 15 years, adopting a rather bombastic style, which made potash a household word in North America. Doyle was also a proponent of the ‘price over volume’ market strategy that helped raise potash prices to unprecedented heights in 2008-2009, which have remained on the high side despite a notable drop from their USD 900/ton peak. This decision may soon prove its validity because there have been several indications that a re-establishment of the Russian/Belarusian potash pricing cartel BPC (Uralkali and Belaruskali) has turned from possible to probable.
It was just about a year ago that the BPC cartel burst, threatening the price-over-volume strategy it had pursued along with its North American equivalent, CANPOTEX (including PotashCorp, Agrium, Mosaic) changing the potash price mechanism. Not surprisingly, Uralkali, the World’s largest potash company, produced 3.1 million tons of potassium chloride in the second quarter of this year. This was a significant increase over the same period of 2013 with 2.4 million tons, potentially unsettling the market. However, while the BPC breakup was a dramatic development that forced the share prices of most potash companies down in 2013, the situation has calmed down since then. After an uncertain phase in the months leading up to the Chinese and Indian contracts being settled at above USD$ 305/ton, which showed that the potash markets had regained traction, given initial fears that potash would drop below USD$ 200/ton.
There are two main reasons that suggest a revival of BPC. The first is that PotashCorp’s new CEO, Tilk, has decided to uphold the strategy of adapting production to demand, which proved to be successful. This suggests that in the medium term – if not even the short term – Tilk expects Belaruskali and Uralkali to revive the BPC. Since last August, Uralkali as much volume as possible, sending prices into a tailspin. Until last July, BPC and the North American counterpart CANPOTEX controlled about 70 percent of the market and ensured that prices always remained at a high level. Nevertheless, last June, the Warburg Research moved the German K+S Potash, one of the companies that suffered the biggest market losses because of the BPC collapse, from ‘hold’ to ‘buy’. Apart from the fact that general agricultural conditions have favored higher potash prices in the past few months, there is more optimism that Uralkali and Belaruskali will resume their pricing mechanism.
This would certainly help potash prices move above USD$ 400 per ton, as they were in the weeks preceding BPC’s breakup. Moreover, reports that the Russian state-owned energy giant Rosneftegaz intended to take over Uralkali’s shares from the previous major shareholder, Suleiman Kerimov. The would-be offer would price Uralkali, the world’s largest potash producer, at USD$ 20 billion. The fact that Rosneftgaz, as Russian government controlled company, wanted to take over Kerimov’s shares hints to the influence of Russian President Vladimir Putin, who has been seeking a fast solution in potash dispute between Russians and Belarusians. The replacement of Uralkali’s main shareholder had raised hopes and expectations that Uralkali and Belkaruskali will resume talks to revive the BPC cartel. Uralkali’s CEO, Vladislav Baumgartner, was arrested in Belarus last August 26, accused of embezzling funds from the BPC cartel. The Belarusian government stated, “Uralkali and Belaruskali could resume their alliance if Uralkali had new ownership”. Last November, Uralkali’s biggest shareholder, billionaire Suleiman Kerimov, sold a 21% stake in Uralkali to billionaire Mikhail Prokhorov as a first attempt to ease tensions with Belarus.