Uralkali Breaks Potash Cartel to Grab Market Share on Price Drop
Comment of the Day

July 30 2013

Commentary by Eoin Treacy

Uralkali Breaks Potash Cartel to Grab Market Share on Price Drop

This article by Yuliya Fedorinova for Bloomberg may be of interest to subscribers. Here is a section
Uralkali shares fell 18 percent to 152.75 rubles at 2:20 p.m. in Moscow, their lowest intraday level since November 2010. Israel Chemicals Ltd. fell 17 percent to 29.39 shekels in Tel Aviv, the biggest intraday drop in almost five years. K+S shares dropped 25 percent to 19.97 euros in Germany.

The Russian company, with the lowest production costs among international peers, will run at full capacity next year, boosting output to 13 million tons in 2014 from 10.5 million tons this year, Baumgertner told reporters by phone. Uralkali's production cost is $62 a ton, compared with more than $100 a ton for North American producers and almost $240 in Europe, according to a company presentation in July.

“We see the potash price may fall below $300 a ton after the change in our trading policy,” Baumgertner said. That's the lowest since January 2010. The price will remain higher than $200 per ton, the production cost level for some international producers, he said.

Cooperation with Belaruskali in Belarusian Potash Co., known as BPC, reached “a deadlock” after the Belarusian government canceled the joint trader's exclusive right to export the country's potash and Belaruskali exported the fertilizer ingredient on its own, Uralkali said in a statement.

Eoin Treacy's view An oligarchy can work to the mutual advantage of its members, at the expense of consumers, when they cooperate in the manner of a cartel to set prices. However, as occurred to an extent with iron ore, one low cost producer can upset the arrangement by increasing supply and depressing prices in an effort to grab market share. This now appears to be unfolding in the potash sector where Uralkali is attempting to leverage its low cost base at the expense of higher cost producers. The most efficient or diversified producers are likely to have a significant advantage if a price war persists beyond the short term.

Potassium fertiliser accounted for 93% of Uralkali revenues last year. The share has held a progression of lower rally highs since September but accelerated lower from late June. It is now deeply oversold and at least paused today above $20. A sustained move below today's low would be required to question current scope for some short covering.

Potash Corp of Saskatchewan, Mosaic, Intrepid Potash, Israel Chemicals and K+S all plummeted today following Uralkali's unilateral action. A rising cost base and excess supply have been challenges for the fertiliser sector since the 2008 peak and probably prompted Uralkali to take this action. Considering the effect this is having on related companies the situation is likely to create the kind of stress that value investors look for.

For example K+S is one of Europe's most prominent potash producers but the business only accounts for 22% of revenues. Salt production is its most dominant business unit. Following today's decline the share has an estimated P/E of 7 and yields 7%. While time is likely required to rebuild confidence, these represent attractive valuations

Potash accounted for 29% of Israel Chemicals revenue last year. The share has fallen from ILS 5000 to 3000 since February and valuations have compressed to an Estimated P/E of 8.47 and yield of 8.4%.

With improved valuations, focus is now likely to turn to how much earnings are likely to disappoint by next year and whether dividends can be sustained.

Back to top