Potash Corp’s Bid for ICL an Attempt to alter the Potash Game
China is trying to find ways to sideline the cartel-like CANPOTEX marketing structure, which sets process for North America’s potash majors. Meanwhile, Potash Corp got its own taste of resource nationalism as the Israeli government made it quite clear it would not be entertaining any bids to buy Israel Chemicals (ICL), the world’s eleventh largest potash producer. Potash Corp has been seeking a deal with ICL in order to be better able to match demands from Chinese and Indian customers, who have become a little too wily in their challenge to the current pricing structure. After the January elections in Israel, Potash Corp has found renewed vigor in trying to acquire a majority control (from 51-100%) of ICL, which is the world’s fifth largest potash producer.
Potash Corp’s CEO, Bill Doyle, met Israeli PM Benjamin Netanyahu last December, who did not object to the deal. Opposition to the deal has come from Israel’s second largest party ‘Yesh Atid’ and the Israeli government has an important stake in the decision; however, negotiations continue between the leading parties to form the new ruling coalition; until that is settled, the possible sale or its terms will remain unclear. What is clear is that Potash Corp wants to increase its share of potash production (which could be as much as a quarter of the world’s total) and gain the ability to lower prices, particularly to the key markets of India and China.
Potash Corp is facing increased competition in Saskatchewan itself from players that remain outside the Canpotex selling system, which apart from the Russo-Belarusian Uralkali, having its own marketing agency (BPC), include ICL itself and Germany’s K+S Ag. Moreover, Potash Corp and other potash majors fear that higher prices for potash will increase competition from junior plays as well. The new strategy, therefore, envisages a different role for such ‘cartels’ as Canpotex. Rather than selling through individual contracts to big volume purchasers; less competition from majors would allow Canpotex to sell higher volumes thanks to lower prices. The low prices would be help to discourage competitors from pursuing new mine and reduce the current space for juniors.
The game that Canpotex and BPC, which together supply 70% of the world’s potash, are playing is similar to OPEC and it involves controlling production output to adjust prices up or down. Should such a strategy change become effective, it should be good news for those juniors that are heading toward production stage and that have low CAPEX and production costs; ideally, they would also have to be geography and transport infrastructure, facilitating reach to key consumer markets. Potash Corp’s ambitions for ICL, in a sense, represent an attempt to shift the current potash balance of power, perhaps fearing the emergence of BHP Billiton as a new potash giant with its – as yet unconfirmed – plans to build the USD 14 billion Jansen mine. Canpotex and BPC can maintain their ‘price before volume’ model if its members continue to control over 50% of the market. The key will be maintaining competitive production costs to reduce the risk of oversupply. Meanwhile, Vale SA appears to be bearish on continuing to pursue the USD 6 billion Rio Horizonte potash project in Argentina while BHP will determine whether or not to continue with Jansen by this summer.
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