Potash gains take some analysts and investors by surprise
Potash & Phosphate Week-in-Review: The InvestorIntel Potash Sponsor membership for the week ending on August 16 gained +5.69%. Most of the companies on the index showed some gains, though in percentage terms, the stars of the week are Magna Resources (CNSX: MNA) +20%, EPM Mining Ventures (TSXV: EPK | OTCQX: EPKMF) + 15.79% and IC Potash (TSX: ICP | OTCQX: ICPTF) +9.26%. All three potash companies had seen some significant drops earlier in August due to OAO Uralkali’s decision to abandon the BPC potash pricing cartel – effectively ending the duopoly with its North American equivalent Canpotex that have controlled potash prices since 2005.
The gains may have taken some analysts and investors by surprise. After all, most predictions tended toward a gloomy scenario of instant price drops to below USD 300/ton, judging by the warnings emanating from Uralkali’s CEO Vladislav Baumgartner. However, tensions in Egypt last week sent oil prices to a two-week high last week, prompting a commodities rally, further boosted by higher gold prices in response to higher demand for the shiny metal in China, driving an overall market tide that ended up ‘lifting the potash boat’ as well. However, Germany’s K+S AG, whose shares suffered the most of any major mid or main tier potash producer (losing over 40% of their value in the first weeks of August), also showed some gains, or at least an end to the hemorrhage of the past weeks; this suggests that some of the factors behind last week’s gains are more directly related to the potash market. Specifically, they are related to how the BPC breakup is actually proceeding.
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Until recently, there was harmony in the potash world. The Russian-Belarusian cartel, BPC, worked closely together with the North American Canpotex and together they dominated the market. The German producer K + S AG came right behind it and stood as an independent potash supplier between the big two. The collapse of BPC, in theory, implies an end to price controls. And the ‘theory’ is the key because Uralkali’s approach is actually not all that clear, because, as already pointed out in other articles at InvestorIntel, it has become more evident that Uralkali would be harming itself just as much – if not more – as its competitors with this strategy. Potash investors may have started to reckon that Uralkali’s strategy may have been aimed more toward preventing new competitors from entering the potash market. Another possibility is that the Russians have been seeking a consolidation in order to reduce the number of providers.
Everything is possible, but the speculation will continue, meaning that the potash market, rather than falling toward new lows, will remain stormy, full of potential drops but also of potential large waves as shown by K+S AG. Its shares crashed from about EUR 27/share to EUR 15/share in response to the BPC collapse. Yet, last week, K+S shares rallied again on the German DAX, gaining as much as EUR 4/share to reach a new plateau of 19 Euros. Surely, there will be bumps ahead, but it seems that the fortunes K+S, which a mere week ago was on the brink of being ejected from the DAX index, offer some insights into how the potash market will function until Uralkali’s strategy comes out in the open. What is clear is that its moves are still wrought with mystery. The company has pulled the equivalent of a ‘kamikaze’ move on the potash market, hurting others while also hurting itself.
This approach may find a logic work in the realm of desperate attempts to uphold irrational ideologies, but it makes no sense in the realm of business. Uralkali has only just started to show its cards. The potash industry could certainly expect lower earnings. This is no surprise and the trend was already heading downward ahead of the Uralkali bombshell; however, it is not heading for the bottom that many have feared. The next big market shaker will be BHP Billiton’s decision over the Jansen Project in Canada. Observers have speculated beforehand that it could no longer afford to continue this project. Nevertheless, Uralkali or not, K+S has already announced it would continue with the Legacy mine in Canada and BHP will likely surprise the market by announcing a similar move, albeit protracting the development period, aiming more toward the long term future of potash, which all analysts ultimately see as bullish.