I was reading through the press today and one piece caught my attention - the president of Belarus, Alexander Lukashenko, was speaking (Russian press link) (Google Translate link) about the possibility of a reunion between Uralkali and Belaruskali.
As a reminder, big problems on the potash market started when Uralkali broke its ties with Belaruskali and adopted a strategy of volume over price. The Potash market was an oligopoly, but the break-up created more competition, which, together with the general bear market in commodities, crushed potash prices. Potash Corp. (NYSE: POT) shares fell immediately after the news and never returned to pre-breakout highs.
Here's what Lukashenko had to say, "Today they [Uralkali] are ready to unite with us. We are not against it. But the conditions should be ours. The conditions are normal for them. Ok, let's restart the work. Let's agree how much we produce. How much you produce, how much we produce. Let's share the markets, I speak in open text, and let's not compete with each other. This will bring good dividends. We are not in a hurry."
He also stated that real offers from Uralkali were necessary to start negotiations. Lukashenko added that a meeting with no real agenda in order to please the market will do no good.
He is probably wrong in this assumption. OPEC production freeze buzz created great upside for oil prices despite the fact that it was clear almost to every observer that OPEC will not be able to coordinate their actions.
As always, statements from top officials should be taken with a grain of salt. However, Uralkali really has the incentive to push for the reunion with Belaruskali.
The first quarter was not great at all for the company. Revenue was down from $720 million in the first quarter of 2015 to $521 million in the first quarter of 2016. Sales declined from 2.5 million tons to 2.3 million tons. The average export potash price declined from $256 per ton to $196 per ton. In short, nothing to be happy about.
At the same time, Uralkali showed better performance than Potash Corp.'s potash segment. Potash Corp.'s sales plunged from 2.3 million tons in the first quarter of 2015 to 1.8 million tons in the first quarter of 2016. The average realized potash price was down remarkably - from $284 per ton to $178 per ton. As far as market share and pricing power go, Uralkali beat its competitor from Canada.
In this light, I don't think that Uralkali will be pushing too hard for a reunion with Belaruskali on Belaruskali's conditions. Uralkali has recently received a $3.9 billion credit line from Sberbank, which was followed by a $1.2 billion pre-export facility with 16 international banks. Uralkali's prediction for global potash demand this year is 58 million-60 million tons, mostly in line with what we've heard from other industry participants this year.
The company also decided not to pay the dividends, a decision that is much easier to implement in Russia where retirees (and most other citizens) don't hold stocks for income purposes. All in all, Uralkali is certainly feeling the pain from market conditions just like other producers, but it does not look pushed into a corner, begging Belaruskali to start doing business together again.
I am a bit skeptical that Belaruskali and Uralkali will find common ground in the near future, but this story is certainly a factor that we should keep a close eye on.
The possibility of positive news on this front is one of the reasons why I believe that Potash Corp. is a terrible short. On the other hand, Potash Corp. shares are stuck in the range and each attempt to go past $18 is met with heavy selling.
In the current situation, only a significant downside in the dollar may help the company's shares catch a bid (I am writing this without knowing the results of the Brexit referendum).
I continue to view Potash Corp. shares as a hold, as the absence of positive catalysts increases the risks for a potential downside. If positive catalysts do not emerge in the second half of this year, Potash Corp. will likely be forced to cut their dividend, which is already not covered by the company's earnings. This is the main risk that may push Potash Corp. shares below January lows.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.