Shares of potash producers plunge as Russian marketing group ...

Shares of North America?s three main potash producers plunged on Tuesday after the blockbuster announcement that Russian company OAO Uralkali plans to break up one of the two main potash marketing groups to boost its sales. The result is likely to be a sharp drop in global prices as the industry?s oligopoly-like structure is shattered and more supply hits the market.

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Shares of Potash Corp of Saskatchewan Inc. plummeted as much as 23% after the announcement, while shares of Mosaic Co. dropped 25%. They pared some of those losses in the afternoon, with Potash Corp. ending the day down 16%, and Mosaic down 17%. Agrium Inc.?s shares fell a more modest 5%, as the company has much lower exposure to potash than its rivals.

Uralkali?s announcement puts an effective end to Belarusian Potash Co. (BPC), the big marketing venture between Russian and Belarusian potash producers. It controls about 40% of global potash exports. The other key marketing group is Canpotex Ltd., a joint venture between the three North American producers.

Investors are betting that Canpotex will find it impossible to maintain its pricing influence following the break-up of its only counterpart and increased supply in the market. Even Uralkali?s chief executive said that prices could fall below US$300 a tonne, according to reports. By comparison, they are a little over US$400 right now.

BMO Capital Markets analyst Joel Jackson called the announcement ?the end of the potash world as we know it.? He believes potash earnings estimates will move ?materially lower? and global price estimates could fall by US$100 a tonne.

?Discipline and price-over-volume leadership in the potash industry seem to have crumbled,? he wrote in a note.

The question is whether other potash producers will follow Uralkali?s lead and produce at or near full capacity to boost market share at the expense of price. Uralkali plans to produce 13 million tonnes in 2014, compared to 10.5 million this year. It decided to end its involvement in BPC after the Belarusian government cancelled BPC?s exclusive right to export potash from the country.

Uralkali has more flexibility than most rivals to operate in a lower-price environment because it has very low costs of US$62 a tonne, according to a company presentation. High-cost operations would have a much tougher time, notably those in Europe.

Canaccord Genuity analyst Keith Carpenter wrote that he had a long-standing concern about over-supply in the potash market, and that the pricing power held by BPC and Canpotex would eventually break down once the companies focused more on market share than pricing.

?This announcement is accelerating that expectation,? he wrote in a note.

Mr. Jackson of BMO noted that the industry could be better off in a volume-over-price environment once the short-term pain subsides. Sales volumes would improve substantially and greenfield projects, such as BHP Billiton Ltd.?s giant Jansen project, could get cancelled. However, he called it a ?very risky? strategy.

Source: http://business.financialpost.com/2013/07/30/shares-of-potash-producers-set-to-collapse/

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