Potash Is The Big Story Today

 |  Includes: MOS, URALL
by: Emerging Money

By Tim Seymour

Uralkali (OTC:URALL), the largest producer of potash in the world, is exiting a marketing venture with Belarus' BPC, signaling that it will sell what it wants, when it wants, at whatever price it wants. As a result, the company is saying potash prices are headed below $300/ton from approximately $400 right now. The Chinese and Indians are licking their chops, as they are the biggest customers of potash.

What's going on? Pricing discipline in the potash industry is falling apart. This was one of the great oligopolies operating in the global markets, but volume over price is now the strategy.

Uralkali yesterday concluded a momentous board meeting where it cancelled its buyback, said it is boosting production, and that it will no longer adhere to its marketing agreement. Prior to yesterday, Uralkali and BPC in Belarus controlled 35% of the world's supply. Uralkali currently has 20% of the market.

What will competitors do in response? Mosaic (NYSE:MOS) can ramp up production; in fact, many players can ramp up production. This could lead to an overshoot to the downside on spot price of potash if some sense of discipline doesn't return to this industry.

The other key part of this news is that with pricing power off the table, it makes the consolidation thesis in the industry less of variable in valuing the sector. Add in a new pricing paradigm of $300 on spot and there will be massive downgrades in the sector for potash players.