The future of the potash market is bullish in view of favorable hints from Moscow and Minsk…
Potash & Phosphate Week-in-Review: The InvestorIntel Potash & Phosphate members average for the week ending September 6th lost -1.09%. Aguia Resources Limited (ASX: AGR) continued along a bullish path as seen in the past few weeks, gaining +21.21% in the wake of its very favorable phosphate results from its initial drilling at the Tres Estradas South Project, showing +14.4% P2O5 at 16 meters from the surface. Phosphate stocks have remained rather stable in the past few weeks in response to predictions of steady global demand over the next few years. Magna Resources Ltd. (CNSX: MNA | OTCQX: MGRZF), which is developing a potash project in the Paradox Basin, Utah, was flat in Toronto even as it received an enthusiastic welcome as it started trading at the OTCQX, gaining +17.02%. Nevertheless, last week, potash investors were ‘spooked’ by two considerations, which in the very jittery commodity investment climate of 2013 were sufficient to force down potash stocks.
Concerns over Chinese growth rates ahead of today’s official announcements, saw investors react cautiously at best. Potash shares, especially those of the majors such as Potash Corp. fell over fears that lower than expected Chinese economic growth would sink shares of commodity producers. Nevertheless, at the time of writing, the opposite is the case as the Chinese economy has actually grown, promoting the ‘bulls’. On Monday, shares in Potash Corp. have been rising as have some of the best placed potash juniors — such as Allana Potash Corp. (TSX: AAA | OTCQX: ALLRF) — on optimism that China’s economy may be set for stronger growth.
The Russian-Belarusian potash dispute also affected potash stocks negatively. The dispute, prompted by Uralkali’s decision to withdraw from the BPC pricing cartel, left former partner Belaruskali in a situation of deep uncertainty, given the potential downward effect on prices. The dispute between the two companies has extended to a dispute between the respective governments of Russia and Belarus, after Belaruskali’s CEO, Vladimir Baumgartner, was arrested in Minsk last August. In fact, Russia and Belarus are considered close allies. But the controversy over Uralkali’s de facto disintegration of the BPC consortium has dominated bilateral relations and affected the overall potash market.
Uralkali and Belaruskali were partners for eight years, within the BPC framework, accounting for 43% of global potash exports. The extent of the diplomatic fallout was such that President Vladimir Putin has personally intervened. Fears over the extent of his ‘intervention’ and its fallout added some jitters to the potash market last week; however, it seems that the market may react differently in light of some generally favorable comments from the Kremlin. Putin is eager to resolve the dispute with Belarus promptly and thinks it is necessary to resolve the conflict and to avoid an escalation according to statements he made on the margins of last week’s G20 summit in St. Petersburg: “We want to solve the problem and not drive it to a dead end – which is very possible, if we make a fuss about it,” said Putin to reporters.
The dispute had sharpened end of August, when Uralkali CEO Vladislav Baumgartner was surprisingly arrested in Belarus. Belarus is very sensitive to potash prices and to the special trade mechanisms that control production since potash is its main foreign-exchange earner, amounting to over 10% of all exports and 12% of state revenue. Suleiman Kerimov, Uralkali’s top shareholder, is an ‘oligarch’ with close and friendly ties to Putin. One of the strategies being speculated is for Putin to force him to sell his share – Another oligarch co-opted by the State? – at a favorable price in order to gain control and revive the BPC alliance in order to restore the pricing balance in the global potash industry. There is already evidence of such as solution, as Kerimov has reportedly sold off a large chunk of his shares.
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The BPC/Uralkali saga, when resolved, will not have been in vain. The collapse of the pricing mechanism has exposed the potash market to what is essential and to what really counts. Project economics have emerged as perhaps the top consideration; in other words, being able to produce a high quality potash product at the lowest possible operational and capital costs (OPEX and CAPEX) is ideal. That seemingly obvious idea got lost in the potash market frenzy of the past few years. In that respect, all the juniors featured in the InvestorIntel Potash & Phosphate members present advantages: they have geologically strong resources, requiring low energy to extract and produce.
Therefore, investors may want to consider potash stocks to take advantage of the turmoil from last week as the market seems to be headed for a favorable turnaround. To this effect, there is optimism ahead of the quarterly results presentation from Germany’s K+S AG as analysts are optimistic and see plenty of upside potential for the stock. After the gloom that the company experienced in the wake of the BPC collapse (it was the most affected company), its share price rose +8.2% in the German DAX at the end of Monday. Moreover, while analysts feared that the BPC would send spot potash prices down to USD$300/ton; they have now raised the floor to a minimum of USD$350/ton.