What follows is an excerpt from Canaccord Genuity’s Morning Coffee report.
OAO Uralkali, the world’s largest potash producer, broke up a marketing venture this week that controlled about 43% of global potash exports.
Uralkali announced that it will no longer be a member of BPC, the potash trading arm it had jointly sold potash through with Belaruskali (the world’s third largest potash supplier), due to statements by Belarus’ President last December where he said that Belaruskali could sell product outside of BPC.
Since then, Uralkali claims that Belaruskali has hurt the fundamentals of the potash market and that going forward potash prices could drop 25% in the future (no time line provided) as a result.
Furthermore, Uralkali has relaunched rail shipments to China and is intending to significantly ramp up global sales in 2014 (to 13 million tonnes from 10 million tonnes estimated in 2013).
Uralkali CEO Vladislav Baumgertner was quoted in media reports saying the change in trading policy may push prices to less than $300 a ton – that’s at least 25% below the current contract price for China.
According to Bloomberg, Uralkali will extend its first-half supply contract with China through December, meaning it will ship as much as 500,000 tons more potash to the Asian market by the end of the year.
Canaccord Genuity analyst Keith Carpenter has believed for some time now that there would be too much of an oversupply of product going forward and that the pricing mechanism held by the two marketing associations (BPC and Canada’s Canpotex) would break down at some point in the future as these entities began to focus more on market share than pricing.
The Uralkali announcement accelerates that expectation. Carpenter continues to like the non-potash weighted equities,
Monsanto Co. (
NSYE: MON,
Stock Forum) and
Agrium Inc. (
TSX: T.AGU,
Stock Forum) versus the potash-weighted equities
Potash Corp. of Saskatchewan Inc. (
TSX: T.POT,
Stock Forum) (
NYSE: POT,
Stock Forum) and Mosaic Company (
NYSE: MOS,
Stock Forum).
Potash Corp. gave up another 5% to trade at $31.06. Mosiac was off 4.4% to $41.90.
Meanwhile, shares of Passport Potash Inc. (
TSX: V.PPI, Stock Forum) were unchanged at 13 cents on Wednesday. "It is our opinion that the present turmoil is likely to have more of a regional than a global impact,'' the company said in a statement.
"While Uralkali has advantages importing into the Asian markets, potash producers in the Western Hemisphere have similar advantages importing into the U.S. and Brazilian markets, which are top import markets, globally."