From Mineweb - Allana mentioned Fallout significant as potash cartel crumbles
No longer is potash pricing under the thumb of two powerhouses, Canpotex and BPC, as Uralkali strikes out on its own.
Author: Kip Keen
Posted: Tuesday , 30 Jul 2013
The potash cartel is no longer a club of two with one group of producers in the West and another in Eastern Europe controling much of the world's potash exports. Until today Canpotex and the Belarusian Potash Company (BPC) oversaw about three quarters of global potash exports. But Uralkali, the world's top potash producer and a member of BPC, up-ended this world order Tuesday, stating it had withdrawn from the BPC - a joint venture with Belarus' potash producer Belaruskali - and that it would go it alone in the business, directing all exports, much to China, through its own sales arm Uralkali Trading.
In justifying the withdrawal from BPC, Uralkali's CEO Vladislav Baumgertner blamed Belaruskali and the Belarus government. Recent policy in Belarus ended BPC's exclusive contract for the country's potash and, as a result, Belaruskali started to sell potash independently of BPC. “We have repeatedly informed our Belarusian partners that such actions were unacceptable and they have ultimately destroyed the fundamentals of our prolonged fruitful cooperation,” Baumgertner stated. “In this situation we have to re-direct our export deliveries through our own trader.”
Uralkali's move sent shudders through the potash marketplace as confidence in the price of potash crumbled. Baumgertner said he saw potash prices descending deeply as Uralkali sought to eke greater profits on volume rather than price. As reported by Bloomberg, Baumgertner said potash prices could fall to $300 a ton or less, which compares to recent pricing around $350 a ton and over $400 a ton last year.
Investor reaction was swift and severe. Shareprices of many major producers and juniors with potash development projects had fallen as much as 20 percent at presstime. Potash Corp and Mosaic, two members of Canpotex, were down 20 percent at presstime, respectively to C$31.01 and C$42.80. Juniors such asAllana Potash and Encanto Potash down by about at least 20 percent, respectively to C$0.47 and C$0.16.
The move by Uralkali shakes more than just confidence in the near term potash pricing. It cuts down the fundamental notion the price of potash was somewhat secure under the influence of BPC and Canpotex.
Desjardins Securities analyst John Hughes, who covers Canpotex, told Mineweb the structural change to the industry - one no longer dominated by two potash powerhouses - destroys the perception that potash producers were “in control of their own destinies” by being able to support the price of potash through production control.
Price cuts would come but not as deep as Baumgertner estimated, Hughes said. “How low does the price go? Not $300 (a ton),” Hughes said. “Maybe $350 to $375.” Other analysts also expected price cuts. The Moscow Times reported VTB Capital analyst Elena Sakhnova estimated potash prices would fall some 30 percent, though it was not clear from the report what was her starting point.
Hughes also reckoned junior potash equities could be in for greater suffering, with shareprices declines in the 30 to 40 percent range. He reasoned a premium - the potential for takeover - was built into junior potash equities, but that with lower potash pricing the likelihood producers would acquire new projects dimmed and undercut such premiums.
“The producers groups are going to be more focused on their own operations now,” Hughes said.
But executives at Allana Potash, a junior with a potash development project in Ethiopia, argued it wasn't going to be all bad for juniors. In an interview with Mineweb, Richard Kelertas, Allana Potash's senior vice president of corporate development, agreed that with lower potash prices higher cost projects would be shelved by juniors and seniors alike.
But he argued there was a silver lining for lower cost juniors - lumping Allana in with this lot - as the field of viable potash projects would contract and that within a few years time seniors would look to acquire lower cost potash projects. He noted major development projects might not go ahead with lower potash pricing and that could add pressure on the potash price and add lustre to lower cost projects.
“If BHP's Jansen potash project is put on hold, or canned, I mean, 'Hallelujah!' for many players,” Kelertas said, referring to one world's largest potash development projects in Saskatchewan. BHP Billiton has not made a decision about going forward on the project, but if it went ahead it would mean a significant new source of potash, potentially depressing potash prices even further.
In an emailed response to questions, Allana President and CEO Farhad Abasov, made similar points as Kelertas, arguing lower potash prices could benefit some projects. “In the short term this is not good,” Abasov said. “However once the dust settles both investors and analysts (and large producers) will start looking at projects that have lowest cost (both capex and opex).”