Arrest of Uralkali CEO should help boost potash prices
The CEO of the world’s most influential potash producer, “Uralkali”, has been arrested in Belarus today. Vladislav Baumgartner was detained in Minsk on Monday on suspicion of abuse of power. Baumgartner was visiting Minsk at the invitation of Belarusian authorities. Other Uralkali managers are also being investigated on suspicion of having committed an offense “under paragraph 3 of Article 424 of the Criminal Code of Belarus related to abuse of power and official authority,” which are the same charges faced by Mr. Baumgartner. The representative of the Belarusian investigative committee said that the basis for instituting criminal proceedings was abuse of power for private gain, which caused significant damage to Belarus’s public and social interests as well as large scale damage to Belaruskali and BPC, the Russian-Belarusian potash pricing cartel (equivalent of North America’s Canpotex). Uralkali’s move to drop from the Belarusian Potash Corp (BPC) cartel forced shares of the major potash companies to drop while encouraging major buyers like China and India to seek deep price cuts for the fertilizer ingredient.
The investigation has also relied on the help of Interpol, which means that the various Uralkali board members and executives could face arrest if they leave Russian borders; presumably these could include Suleiman Kerimov, Uralkali’s main shareholder and billionaire owner of Russia’s most expensive football team. While Uralkali’s decision to abandon the price mechanism that essentially guaranteed cartel pricing for potash sent shares of most potash producers plunging since last July 30, few wondered what Uralkali could possibly have gained from such a move. Indeed, Uralkali itself saw its own share price drop by as much or more than the other major players in the potash market. Such was the drop that Kerimov has decided to sell some of his football team’s top players, seeing as he has personally lost some USD$ 375 million after his own Company gave up the pricing scheme.
Get our daily investorintel update
Uralkali claimed that abandoned the pricing mechanism because of damaging decisions by Belaruskali, which was allowed by Belarus’s leader, Alexander Lukashenko, to boost output and deliver potash beyond the BPC pricing framework. The Uralkali logic, then, was to switch to a ‘higher volume at lower price’ philosophy. Uralkali may also have been prompted by the desire to discourage large mining companies such as BHP Billiton from making a grandiose entry into the potash sector. BHP was not discouraged, as it announced additional investment at the Jansen potash mine in Saskatchewan. Evidently, given Uralkali’s failure to block BHP and the personal losses of its billionaire shareholder, this has failed, suggesting that Uralkali’s goals were far more insidious and aimed at overwhelming Belaruskali in an attempt to take it over completely, allowing it to better control prices and volume. Indeed, such a move would have actually helped increase world potash prices.
Kerimov’s losses were matched by other oligarchs with big holdings in Uralkali. Zelimkhan Mutsoev and Alexander Nesis (both officers of the company) sold their stakes in Uralkali last June during a company sponsored buyback program. Mutsoev, who is a Russian MP, explained his decision to sell his 6.8% stake (over a billion dollars) because of a law that prevents politicians from having “direct control over business assets.” Uralkali’s shareholders have grown furious over the Company’s moves; many Russian analysts have expressed concern that Uralkali’s decision to break the Russian-Belarusian potash cartel has made Russia look like a “basket-case”. Russia has been under much pressure lately and none more so than the past weekend as the NATO threats to intervene in Syria, whose main arms supplier and defender at the UN is Russia, also reflects a major cooling of Russia’s relations with the West and the United States in particular – in light of the Edward Snowden asylum case. In other words, Russian authorities, at the highest level, may also have become outraged with Uralkali, facilitating the arrest of one of their most prominent business personalities. Baumgartner, curiously, did not receive any warnings and he visited Belarus at that government’s invitation, oblivious to the investigation.
Uralkali has already applied to the Foreign Ministry of Russia and the Russian consulate for assistance in solving the problem and the immediate release of the CEO – which has not occurred. Uralkali’s shares accelerated their decline on news of Baumgartner’s arrest. In addition, “Belaruskali” CEO Valery Kiriyenko suggested that the Belarusian government is also considering suing Uralkali directly. The benefits of Uralkali’s mess have already materialized for its competition. Potash Corp’s shares have already risen 2.5% at the time of writing. Germany’s K+S, whose shares dropped to a level that had analysts concerned it might be dropped from the German DAX industrial index, gained about 5% on the news. Mosaic and Intrepid have also shown gains as Investors who borrowed and shorted potash stocks in the hope of a further fall in share price, have now been forced to cover their losses.
Regardless of how soon Baumgartner will be released, it will be difficult for Uralkali to continue along the ‘goes it alone’ path for much longer. The official reason Baumgartner’s arrest is unclear, but it is clear that there is a power struggle between Uralkali and Belaruskali that will be played out in the courts, weakening Uralkali’s decision to drop from the potash BPC cartel, which will help boost potash prices again – possibly lifting the floor price to a higher level than it was before the fateful decision. Meanwhile, Belaruskali said it had received an invitation from China to negotiate a new contract; last January, China, which is the world’s largest potash consumer, agreed to buy up to one million tons from BPC in the first half of 2013 for $400 a ton. Surely, China cannot expect to get the kind of discount it had hoped to secure in light of the Uralkali situation given what is shaping to be yet another reversal in the potash market – this time in favor of higher prices.