EDITOR: | August 27th, 2013

Uralkali just a step on the road to potash cartels’ demise – if you doubt that, look how the German syndicate was busted

| August 27, 2013 | No Comments

Nothing is forever in the world of potash. As the old saying goes, if you do not study history then you are doomed to repeat it.

That applies to potash. You have to see the latest developments – both the Uralkali defection from the cartel with Belarus, and the subsequent arrests in Belarus by way of reprisal – in some sort of historical context. Also, we have learned yet again how quickly a market can change: when Uralkali announced it was going it alone and would ramp up production to take advantage of its low production costs, share prices in competitors tumbled, Germany’s K+S plunging about 40%, Potash Corp of Saskatchewan losing about 25% of its market value. Now, with the Belarus arrest of Uralkali chief executive Vladislav Baumgetner, those shares have rebounded with K+S up 20% since the news broke.

Everyone got excited about Uralkali going it alone. It takes you back to the opening sentence in a report in The Wall Street Journal about a potash syndicate about to be busted wide open. Except that this story appeared in the issue of August 29, 1914 – that’s 99 years ago on Thursday! The story, filed out of Boston, opened: “It is probable that the world is about to shake itself free from the domination of the German Kali Syndicate (as the potash cartel was known).” It went on breathlessly that “potash in immense quantities has been discovered only recently in Spain” with engineers proving up 200 million tons near Barcelona.

But it was a slow process to break the German stranglehold: even by 1929 Germany along with France (which had regained control of areas of Alsace with potash mines) supplied 96.5% of the world’s potash. It is a slow process now, too, but one suspects the result will be similar. Then it was Germany, now it’s Canpotex and Belarusian Potash.

The writing might not have been on the wall back in the ’30s – after all, this was something new then. But today we have an example, a road map for what will probably happen. If nothing else, the Chinese will see to that. They have had limited success with breaking the iron ore cartel, but it seems it may be taking a little than expected to get various small suppliers up and running and also to develop large Chinese-controlled projects in Africa. But you can expect that Beijing has a similar long-term plan for potash, vital to its food security. China is already buying potash projects, and will certainly do off-take deals with new mine projects to break the power of Canpotex and the Belarus crowd. And new mines owned by Australian, Canadian and other companies will provide new options for buyers worldwide, especially in India and China. And keep an eye on Kazahkstan; it has big potash ambitions. And one should mention the brine projects in Argentina.

Uralkali clearly sniffed the wind. It must know that the cartels now have a limited shelf life and obviously it wanted to develop its own business niche based on its cost advantage and damage-proof itself for what lies ahead.

It would have been crazy not to: after all, there’s plenty of competition in the offing with K+S developing its Legacy project in Saskatchewan and BHP Billiton pressing on with Jansen. And The Financial Times today reminds us that Brazil’s Vale is looking for new potash assets.

What we are seeing is a repeat of what happened to potash in the 1930s when the rest of the world had quite enough of the German syndicate. This from The Christian Science Monitor of January 6, 1934: “With the development of potash deposits in California and New Mexico, potash has gained the status of an American commodity after having been practically monopolized by the German salt mines, near Stassfurt, since 1860”.

Germany stopped exporting potash in 1915 due to the First World War; as result, the U.S. Geological Survey started looking for domestic sources. It found the brine in Texas and the brines of Albert Lake in Oregon and in three Californian lakes (Searles, Owens and Mono, if you’re looking for a new brine project).

But then the end of the war saw cheap German supplies resume; that and the 1921 agricultural depression drove most American potash companies out of business. But the U.S. Bureau of Mines in 1927 began an extensive search in Texas and New Mexico and by 1929 there came into existence the U.S. Potash Corp (British-owned, actually), making its first shipment in 1930. Three years later the American Potash and Chemical Corp, mining at the edge of the Mojave Desert, was ploughing $1.25 million into expansion.

By 1935, U.S. production had increased 500% over a 10-year period. In 1931 we had the Spanish ramping up production. And the Manchester Guardian was reporting the discovery of a Soviet potash deposit containing 16 billion tonnes and located close to a tributary of the Volga.

By 1939 the Americans were producing 52% of their own needs.

The real fascination in this development is how the Europeans shot themselves in the foot. The rot set in during the Great Depression when the Spanish set out to undercut the prices being demanded by the German syndicate. Once Franco came to power after 1936, Spain was brought back into the syndicate and up prices went. This artificially high price level allowed the growth of the U.S. potash industry as an economic proposition. As one magazine reported at the time: “The syndicate’s final stupidity was to maintain its prices during the 1938 depression. As a result, its sales to the U.S. fell from 351,445 tons to 193,609 tons”.

You can see the parallels, can’t you? Canpotex and Belarus, aided by Israeli Chemicals, have tried to keep the price tight, with the Canadians shuttering production as part of the effort.

These buoyed prices have therefore kept alive all the various projects around the globe. And kept alive the new emerging producers who will, at some stage, see off the power of the cartels.

We will have turned full circle.



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