A price war in the potash market is pushing down profits and inciting political tension, making for a difficult investment environment at least through the end of next year. With a small number of players controlling a large swath of global potash sales, Citi Research analysts Andrew Benson and Tina M. Fordham think it’s only a matter of time before the sector returns to oligopolistic pricing, but most companies are better avoided in the short term.
Potash market share problem
Problems started when Uralkali OAO (LON:URALL) (OTCMKTS:URALL) exited Belarusian Potash Co on July 30, most likely in reaction to its plummeting market share. Since then the company has been pursuing a strategy of maximum volume at the expense of price, slashing their and everyone else’s profits at the same time.
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Exiting its alliance with Belaruskali may have been a strictly financial decision (though there are rumors it wasn’t), but Belarus gets about 20 percent of its foreign currency and 6 percent of GDP from Belaruskali, so actions that threaten it became political quickly. On August 28, Uralkali OAO (LON:URALL) (OTCMKTS:URALL) CEO Vladislav Baumgertner went to Minsk to discuss the situation and was promptly thrown in jail on charges that he abused his position within BPC. He’s facing ten years in prison, though most people see the charges as a chip to be cashed in at some point in the future.
Uralkali to regain market
In the meantime, Uralkali OAO (LON:URALL) (OTCMKTS:URALL) is using its low costs (nearly the lowest in the world) to punish competitors and regain market share. “We think potential investors need to appreciate that a price war is underway and this is going to lead to weak earnings for the potash space in the coming quarters,” write Benson and Fordham.
Prices have fallen from $495/ton last year to an estimated average of $403/ton this year. Next year prices are expected to drop to $350/ton CFR. As Belarus sees one of its national champions take a beating in the market, don’t be surprised if they try to exert more political pressure on Ukraine. Russian President Vladimir Putin has so far stayed above the fray, saying he doesn’t want to “kick up a fuss,” but he has put some pressure on Belarus to release Baumgertner by cutting oil supplies 25 percent and banning pork imports from Belarus. Ultimately, Benson and Fordham expect reconciliation to come about because its mutually beneficial (probably after Uralkali OAO (LON:URALL) (OTCMKTS:URALL) feels more secure with its position in the market), though politics may help move things along.