Potash – Breaking Up Apparently Isn’t That Hard to Do


All discarded lovers should be given a second chance, but with someone else.

–          Mae West

This morning, Belaruskali, the erstwhile cartel partner of Uralkali announced that it had reached a preliminary agreement with a Qatar-based fertilizer marketing company, Muntajat, to cooperate on the global sale of potash, with the goal of strengthening and expanding Belaruskli’s position in existing and new markets.

We see this development as important because some analysts were holding out hope last week that Belaruskali and Uralkali would kiss and makeup, thereby restoring the global potash market to its cartel-based pricing algorithm.  We would suggest that in potash, as in life, kissing and making up becomes far less likely when both partners are dating someone else.  Impossible? No.  Less likely?  For sure.

What today’s news likely signals is that potash pricing has moved closer to becoming a race to the bottom.

Also, we have seen some commentary suggesting that BHP Billiton might be interested in Mosaic (MOS).  A couple of thoughts there:

  • It is possible, of course, as BHP has made it abundantly clear that it is interested in building its “fifth pillar” and, as we wrote last week, we didn’t see a second run at POT as likely.
  • Uncertainty surrounding global potash prices has made the economics around BHP’s greenfield project “Jansen” far less stable, changing the dynamics of the build versus buy decision.
  • If BHP were to make a bid for MOS, BHP has made it clear in the past that it would not be a party to Canpotex, the Canadian equivalent of the former Russian potash marketing cartel.  Therefore, an acquisition of any potash company by BHP should be viewed as a longer-term negative for the possibility of future price cooperation among producers.

In the face of this uncertainty, we continue to anticipate short-term volatility, but that these companies are a source of funds (at best) over the medium term (3-6 months) absent any change of heart with respect to restoration of the cartel pricing algorithm, an event that we continue to see as increasingly unlikely.  We would favor lower cost producers (Uralkali) in what is an uncertain demand environment given the price trends in global grains and oilseeds and eschew higher cost production companies such as K&S.  For those investors that view a BHP move for MOS as a possibility, we see exposure to that event as best expressed through long-dated options.

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