Uralkali (URALL) yesterday reached a potash sales deal with China for $305/metric ton, indicating a possible end to the uncertainty in the potash market after prices fell more than 25% from $400/ton last summer when the Russian producer left a trading partnership with Belarus and broke an informal global pricing cartel.
While J.P. Morgan seems to see a return to price rationality, others aren't so sure; Morgan Stanley is looking ahead to H2, when demand is weak and there's incentive to price undercut again, while Cowen thinks the new contract is likely to keep pricing down for some time to come and, combined with Agrium's (AGU -0.1%) downward guidance, may weigh on fertilizer shares.
Wunderlich notes Intrepid Potash (IPI -0.6%) sells granulated potash, which is priced at a 10%-15% premium to standard; at $335/ton potash, the firm figures IPI could see a ~$165M swing in free cash flow in 2014 from a negative $115M last year to a positive $50M-$55M in 2014.
Uralkali (URALL) Q3 revenue of $856M (-19.2% Y/Y). Net revenue of $697M (-21% Y/Y).
Production volumes broadly unchanged Y/Y at 2.7M tonnes of KCI
Sales volumes broadly unchanged at 2.6 million tonnes
Average export price -27% to $272 per tonne
Management comments: "Q3 was a turning point for Uralkali. By mid-summer 2013, potash prices had been declining for six quarters and responsible market leadership via a price focused strategy had started to materially negatively impact Uralkali’s market share. Therefore, after careful consideration, Uralkali’s Board of Directors decided to change the Company’s market posture and move from a rigid ‘price-over-volume’ strategy to a more flexible approach whereby the Company continues to focus on shareholder value maximisation, prioritising volumes or prices depending on the market situation."
"During July-August, the potash market remained stagnant, firstly, due to a seasonal lull, and, secondly, due to customer caution in response to the changing market landscape. However, as the fall application campaign approached, we saw restoration of demand in major growing regions, such as China, India and Brazil. We believe that the new market environment will balance potash supply and demand in a more efficient way, thus ensuring higher levels of fertiliser availability for consumers."
The end of the uncertainty weighing on Potash (POT +0.1%) and Mosaic (MOS +2.2%) may be at hand, J.P. Morgan analyst Jeffrey Zekauskas writes, believing the point of Uralkali's (URALL) ownership change is the alteration of its go-to-market strategy, and an execution of a change in strategy should raise the value of POT and MOS given their sensitivity to changes in product prices.
POT and MOS are "undervalued," the firm says: Both companies have replacement values nearly twice their current share prices, POT has a 7.5%-8% sustainable free cash flow yield following the conclusion of its large potash capacity expansion, and MOS has a large share repurchase program it plans to execute beginning at the end of this month.
At least one analyst thinks Baumgertner will resign; a lot depends on the attitude of the Belarus president toward him, and "given that it may be not warm, it would be easier for Uralkali to negotiate the terms of the new trading venture with Belarus with another CEO.”
Baumgertner was arrested in August and spent a month in a Belarusian jail after he withdrew his company from a joint venture with potash supplier Belaruskali.
Russian billionaire Mikhail Prokhorov - owner of the Brooklyn Nets - has agreed to acquire a 21.75% stake in Uralkali (URALL), the world's biggest potash miner, from the company's main owner, Dagestani tycoon Suleyman Kerimov.
Kerimov and his partners own a third of Uralkali, while China Investment Corp, China's sovereign wealth fund, purchased a 12.5% holding in September.
Uralkali caused turmoil in the potash markets after it ended its joint venture with Belarusian state-owned miner Belaruskali in July. The JV, called Belarusian Potash Co, controlled around 40% of the global market and so had a major influences on prices.
Following the breakup, Belarus arrested Uralkali CEO Vladislav Baumgertner in August, since when he has been in jail or under house arrest. (Previous)
While some reports suggest the partnership could be revived, Ostling says it would be difficult to "put Humpty Dumpty back together again" because of deep animosity on both sides, but that it wouldn't be impossible if the right agreements were reached.
Russian authorities say they opened a criminal case against the jailed chief executive of potash producer Uralkali (URALL.PK) and are seeking his extradition from Belarus to face charges in Russia, in what could be a face-saving move to defuse the potash rift.
Russia's main investigative agency says its review of the case indicates enough evidence to charge the Uralkali chief in Russia, though political analysts doubt he would serve any prison time even if convicted.
Global potash prices will stay above $300/metric ton but likely will fall further this year, bottoming out in early 2014 when supply contracts for top global consumer China are set, and rebounding thereafter, according to Uralkali's (URALL.PK) head of sales.
He gives no current average price, but says the domestic price in China of ~$330/metric ton delivered at the border was a "guideline" for the company's rail supplies.
Recent reports have said a large stake in Uralkali could be sold to one of several local bidders, but sources tell Reuters that no buyers are close to a deal now.
Sources say the Kremlin is eager to repair the rift with Belarus that led to the collapse of the informal global potash cartel and has made clear to potential bidders that some kind of sales cooperation with the country - a close Russian ally - should be restored after any deal.
Indian Potash says it has renegotiated an annual contract for the import of ~1M metric tons of potash at a 12%-plus discount following the breakup of a global fertilizer grouping led by Russia's Uralkali (URALL.PK), which says it is now pursuing a volume-over-price strategy.
Indian potash importers, who form the second biggest buyer group after China, sought discounts on their current contracts following the breakup and said the slide in the rupee vs. the dollar since May had made imports more expensive for them.
The transfer to house arrest comes as Russian Pres. Putin is scheduled to meet today with Belarus Pres. Lukashenko and after Russia's prosecutor general met with his Belarus counterpart earlier this week.
Potash stocks are lower after China acquired a 12.5% stake in Russian potash producer Uralkali (URALL.PK -1.4%), a deal that could put new pressure on prices and reduce the chances of the Russia-Belarus cartel being revived.
The deal could strengthen China's position in negotiations with other producers; China imports ~6M metric tons/year of potash, more than 10% of global demand, and the Chinese potash price is considered the global benchmark.
The deal also could give Uralkali an upper hand in selling potash in the Chinese market ahead of Canpotex, the North American potash cartel owned by Potash (POT -1.4%), Mosaic (MOS -1.4%) and Agrium (AGU -0.8%).
The president of Belarus hints for the first time at a possible resolution in the potash fight that has rocked global markets, suggesting he is open to the idea of sending the jailed Uralkali (URALL.PK) CEO back to Russia for prosecution there.
Belarus officials reportedly issued a copy of their case file against the CEO to Russian authorities last week as the first step in possibly sending him back to Russia, where he could stand trial without being held in custody.
Analysts say while a settlement in the potash case may be close, it is unclear if a renewed partnership would ever be able to restore the market to where it was.