EDITOR: | July 30th, 2013 | 1 Comment

Uralkali fires first shot in the potash price war..but do not panic

| July 30, 2013 | 1 Comment
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UralkaliUralkali has launched the equivalent of a blitzkrieg on the potash market by announcing it would abandon the Belarus Potash Company (BPC), the pricing organization formed by Uralkali and Belaruskali that along with Canpotex (PotashCorp, Mosaic, Agrium) in North America have essentially controlled potash prices. The BPC-Canpotex duopoly has allowed the world’s largest potash producers to maintain potash at or above USD$ 400/ton. By abandoning BPC, Uralkali, which has lower production costs than current potash miners in North America, has decided to focus on volume, targeting the Chinese market. It happens that China is where potash demand is highest and where it is expected to grow even further. Uralkali’s departure has rendered BPC powerless; it has also dealt a significant blow to Canpotex, achieving in a simple move, what many feared BHP Billiton would do should it decide to go ahead with its Jansen potash mine project. Effectively, Jansen might be the first victim of the Uralkali bombshell.

BHP’s board will be hard pressed to vote in favor of proceeding, given that the cartel market for potash has suffered an almost fatal blow. Potash will now be sold like most other commodities and goods: price competition. Not surprisingly, share prices of the few potash producers in the world have fallen sharply on the news. For its part, Uralkali announced it would produce 30% more potash next year. The one possible price pressure might come from the fact that the China Investment Corporation (CIC) – a Chinese sovereign fund – purchased Uralkali bonds, giving the Chinese 12.5% stake in the Company. China imports about USD $ 19 billion worth of potash a year and it has an interest in potash prices remaining high enough for Uralkali to remain highly profitable. Moreover, while the doomsayers will have everybody’s ear in the next few weeks, history has shown that while the value of a cartel crusher – such as Uralkali – does make some gains at first the market ultimately settles at a lower price level, which will reduce any benefits that Uralkali hoped to gain.

Conspiracy theorists and serious analysts alike  might wonder if Uralkali’s move is a temporary one to drive off BHP from going ahead with the Jansen mine; after all, the Anglo-Australian mining giant was is slated to take its final decision promptly. Given that Uralkali last sold potash to China at USD$ 350/ton, analysts have suggested that potash prices would fall to USD$ 300/ton. Nevertheless, the Uralkali move will not really affect the merging junior potash plays; some like Allana Potash (TSXV: AAA | OTCQX: ALLRF), whose potash assets are being developed aiming to maintain some of the lowest operational and CAPEX costs of any potash asset worldwide, might become appetizing morsels for the potash majors looking for ways to produce at lower costs and compete with Uralkali at its own game.

It is not even necessary to travel to Ethiopia to find valuable potash assets with low CAPEX potential. In Utah, there are several such as EPM Mining (TSXV: EPK | OTCQX: EPKMF), Magna Resources (CNSX: MNA) and Potash Minerals (ASX: POK), which are aiming to produce low cost potash using low energy processes favored by their very location. In New Mexico, there is IC Potash (TSXV: ICP | ICPTF), which proposes to produce the cheapest Sulfate of Potash (SOP) product in the world. By the time these companies reach production stage by 2015-2017 the population growth factor in some emerging countries with fast growing meat consumption will demand more potash fertilizers. For these juniors, the Uralkali decision might mean some more difficult financing at first, but ultimately they were always going to be players outside the cartel system, targeting niche markets, lower production costs and strategic locations. In some ways, the market may be even better for the juniors if Uralkali’s decision does in fact mark the death blow for Jansen, which could has the potential to produce enough potash by itself to embarrass Potash Corp and Uralkali combined.


Editor:


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