Potash Corp beats Q1 Expectations but gives up on bid for Israel Chemicals
Potash Corp (NYSE: POT) has announced its first quarter results, beating expectations, reflecting rather bullish prospects for the potash market in 2013. Potash Corp increased its profits significantly and remains confident for the rest of the year’s prospects. The Saskatoon based Company showed a first quarter profit of USD$ 556 million, which represents a 13% increase from Q1 2012. Significantly, the results suggest increased potash sales, almost doubling from 1.2 million tons to 2.2 million tons, even if at a lower average price (from USD$435 to USD$ 363/ton). Potash Corp’s results suggest a rebound in demand, establishing a strong foundation for the rest of the year and for the sector in general. Buyers in China and India have returned to the market in late 2012 after the break and potash demand has picked up noticeably, even if prices are not expected to increase significantly. Since the start of the fiscal year 2013, potash production has increased by 37% compared with the previous year.
Prices are not expected to drop below the USD 400/ton barrier set for the China contract last December. Nevertheless, even as it announced its very strong results, Potash Corp decided to scrap its planned and much discussed takeover bid for Israel Chemicals Ltd (ICL, the world’s sixth largest potash producer) in the wake of strong political and labor opposition. Israel’s new Finance Minister, Yair Lapid a populist, was the main force behind the government’s opposition to the deal. Had the ICL bid been successful, Potash Corp would have overtaken the Russian OAO Uralkali as the world’s largest producer, giving it even more market clout. Potash Corp is facing increased competition in Saskatchewan itself from players that remain outside the Canpotex selling system.
Apart from the Russo-Belarusian Uralkali (with its own marketing agency (BPC), these include ICL itself, Germany’s K+S Ag and potentially BHP Billiton, whose proposed USD$ 14 billion Jansen potash project in Saskatchewan is but a signature away from being approved by the Board. Perhaps, with Potash Corp failing to secure ICL, the BHP plans for the Jansen mine are even closer to being inked. Potash Corp’s ambitions for ICL were an attempt to shift the current potash balance of power, perhaps fearing the emergence of BHP Billiton as a new potash giant. Canpotex and BPC can maintain their ‘price before volume’ model if its members continue to control over 50% of the market, something the ICL addition would have enabled.
The new strategy would rely on the ‘cartels’ such as Canpotex to change their approach. Rather than selling through individual contracts to big volume purchasers; the more dominant market share would allow Canpotex members to sell higher volumes at lower prices. Those same low prices would be help to discourage competitors from pursuing new mines, also reducing the current space for juniors. Surely, Potash Corp’s vanished bid for ICL has not discouraged it from finding other routes to achieve a bigger market share. Indeed, Potash Corp had targeted ICL also because of its closer geographic position. Israel’s proximity to the Suez Canal would have given Potash Corp a significant advantage in selling and delivering potash to markets in China, India and other Asian powers.
At present, Uralkali is more competitive in that respect. The geographic aspect of these emerging potash market wars hints to the likelihood of Potash Corp seeking to acquire control of other potash projects in a strategic location, to ease its reach and expansion to key markets. The demise of the Brazilian Vale’s USD$ 6 billion Rio Horizonte potash project in Argentina has also left more room for expansion. However, foreign investment adverse policies in Buenos Aires have discouraged all major players-except perhaps a Chinese government backer player-from picking up the project where the Brazilians left it. The solution might be sought somewhere near the Red Sea and the Indian Ocean, an ideal location – even better than what ICL would have provided.
The Dallol potash project in Ethiopia being developed by Allana Potash (TSX: AAA |TCQX: ALLRF) is an ideal candidate. Allana recently filed its feasibility study with the Ethiopian Ministry of Mines, putting it on track to reach production by early 2015, while all other facets of the projects are also proceeding on target, including the relevant roads and the port in Djibouti. Allana has measured and indicated sylvinite resources as at February 2, 2013 of 327.42 million tons of 28.31% KCl and inferred sylvinite resource of 90.76 million tons at 27.80% KCl. Once in production, Allana will not be able to compete with ICL in yearly output; nevertheless, it will have a more sustainable future. ICL’s potash plant on Dead Sea has faced growing criticism from environmentalists. The tourism sector is complaining of receding waters and the growing and spreading concerns could lead to ICL having to shut down the ‘Dead Sea Works’, given that it has been blamed for of the problem.