RE: Canpotex strategy?
ANALYSIS-Bruised potash sellers may lift curbs on output
Tue, Feb 12 18:00 PM GMT
* Uralkali sees new plan if market share drops
* Balance between price, volume needed-Agrium
* Cutting price could lift sales, stymie rivals
By Rod Nickel
WINNIPEG, Manitoba, Feb 12 (Reuters) - The world's top
potash producers may abandon attempts to rein in output to keep
prices high, switching to a strategy of ramping up sales as they
face rising competition and big buyers of fertilizer take an
increasingly aggressive stance.
Such a shift would change the game for the giant North
American and Russian-Belarusian producers, which export the
fertilizer through Canpotex Ltd and Belarusian Potash Co,
respectively.
Instead of reining in output to support prices, and then
selling potash to big buyers in contracts that set a benchmark
for other deals, the miners might maximize sales through
marketing organizations in what some see as a throwback to
cartels of the past for commodities such as coffee, rubber and
tin.
By boosting sales volume, the established producers could
drive down prices to the point where opening new potash mines
might make no sense for competitors.
Canpotex and BPC account for about 70 percent of world
exports. If that dropped to 50 percent as competitors open new
mines, "reasonable economic players" will simply not implement
the current strategy stressing price rather than volume,
Vladislav Baumgertner, chief executive of Russia's Uralkali OAO
, told Reuters in an email.
"In this situation, we will look more like traditional
industries: the main competitive advantage will be the
production costs and the cost of capacity expansion," he said,
warning that the addition of any more potash from newly opened
mines could overload the market.
Canpotex and BPC, and the producers behind them, face supply
challenges from new mines planned by BHP Billiton Ltd,
K+S AG and a raft of junior players, as well as
pressures from buyers smelling an opportunity to seek deals on
more favorable terms.
But Baumgertner said he doubted that many of the proposed
mines will get built, because potash prices are too low to make
them viable.
Demand for potash, a nutrient that improves yields of corn,
rice, palm and other crops, boomed in the past decade as diets
and incomes improved in developing countries and demand for food
rose.
Prices soared in 2008, prompting an unsuccessful, $39
billion bid for Potash Corp of Saskatchewan, the
world's biggest producer by capacity, from global mining giant
BHP Billiton.
They fell back in 2009 and bottomed out in 2010 as farmers
balked at sky-high prices. Potash recovered modestly in 2011
before drifting lower last year. While most in the industry
continue to see strong demand growth long into the future, some
question whether there is too much new capacity being readied, a
case that has gained momentum with the current lackluster
prices.
Spot prices for potash are now around $460 per tonne, well
below the price of $550-$600 that Mike Wilson, CEO of No. 3
Canadian producer Agrium Inc, sees as needed if new
entrants are to make money.
"Every one of these (potential rivals) are getting their
capital cost reports and they're cringing," Wilson told Reuters
in an interview. "They're sitting there choking."
A BHP spokesman declined to comment on what potash price it
requires for the board to give final approval to its Jansen,
Saskatchewan mine, but pointed out that hundreds of people
continue to work on building the project.
While the new mines pose big questions about the future of
the market, the present hasn't been so hot either.
China and India, the two big importers whose purchases
traditionally set a floor for global potash prices, stayed out
of the market for much of 2012's second half, bruising Potash
Corp's balance sheets.
Deals that China and India eventually signed included steep
discounts on big volumes, and the two are also taking small
steps to loosen their dependence on Canpotex and BPC with deals
to buy future mined potash from upstarts Prospect Global
Resources Inc in Arizona and Karnalyte Resources Inc
in Saskatchewan, respectively.
But existing producers still have advantages against new
entrants, because it's cheaper to expand existing mines than to
build new ones.
Shifting the priority to volume from price would be ironic
for Potash Corp, given that concern about the BHP bid for Potash
Corp centered partly on fears that BHP would not curb output and
weaken Canpotex, which handles sales of Saskatchewan potash from
Potash Corp, Agrium and Mosaic Inc.
BPC handles sales for Uralkali and Belaruskali.
"You've got to get some wind back in your sails to get
prices back moving up," Potash Corp Chief Executive Bill Doyle
said of his own company on a Jan. 31 analyst call. "Of course,
the wind for us is volume. We focus so much on price, but you've
got to have some volume coming back in the market."
Potash Corp shut several mines for weeks at a time this
winter, seeking to match supply to demand.
But Agrium's Wilson said a lower price is no guarantee of
extra sales. "We've got to strike the right balance," he said.
Canpotex member companies say they do not co-ordinate
production to set prices, the traditional mark of a cartel. But
they conduct off-shore sales and co-ordinate transportation
through Canpotex in an arrangement that critics say is cosy.
"It's not a clear-cut situation," said Mike Burt, director
responsible for industrial economic trends at the Conference
Board of Canada. "I can't really say what's going on inside the
organization. The public statements are that the companies are
setting their own production. But it's obviously a fairly close
relationship."
He said the global potash trade might best be described as
an oligopoly, dominated by Canpotex and BPC. It can be compared
to the iron ore sector a few years ago, when a few big producers
set market prices with Japanese steel buyers.
That situation changed when China became the world's
dominant buyer, and BHP Billiton switched to a strategy of
maximizing volume, establishing itself as the low-cost producer.
Canpotex declined requests for an interview.
BARGAINING CLOUT
Canpotex and BPC struggled in 2012 to maintain their
bargaining clout.
With China and India on the sidelines, North American potash
supplies ballooned to 37 percent over the five-year average in
December. And while Potash Corp does not see many of the planned
mines getting built, it still expects global capacity to grow 24
percent to 77 million tonnes by 2017.
BHP is digging two mine shafts in Saskatchewan for what
would be the world's biggest potash mine, ahead of a final board
decision this summer. Germany's K+S started work on
its mine in the Canadian province last summer. But Vale SA
recently delayed projects in Canada and Argentina.
In a recent report, Scotiabank analyst Ben Isaacson said a
volume-over-price strategy could help Potash Corp by frightening
away competitors and reducing the per-tonne cost of production.
"Perhaps one of the most important benefits of dropping
potash prices to the low $300s (per tonne) would be that the
continued spending of capex by almost all greenfield sponsors
would no longer make sense. We believe the majority of
greenfield projects, including many brownfield expansion
projects, would be shelved," Isaacson wrote.
Among the big buyers, fertilizer companies and farmers in
India would respond quickly if prices fell to compete better
with urea, a more common nitrogen fertilizer, said a senior
official from an Indian fertilizer co-operative, who declined to
be named.
But it is hard to predict what will happen. The Indian
government plans to cut its fertilizer subsidy for 2013/14 to
take advantage of lower potash prices.
Ultimately, whether potash producers change course depends
largely on decisions in the boardrooms of potential rivals.
"It's tough for us to get a picture on when those projects
will come to market," said Rick McLellan, Mosaic's senior
vice-president of commercial sales. "Our strategies will develop
as new competitors enter."
(Reporting by Rod Nickel in Winnipeg, Manitoba; additional
reporting by Rajendra Jadhav in Mumbai, Natalia Shurmina in
Yekaterinburg, Ron Bousso in London and Julie Gordon in Toronto;
Editing by Janet Guttsman and Leslie Gevirtz)