The Potash Soap Opera Continues

by: Price Point

The global potash markets remain volatile as most purchasers are sitting on the sidelines waiting for prices to drop further. Prices continue to fall in one of the key region, Brazil, where transactions are taking place. Uralkali (OTC:URALL) and Belarus dispute and any sale of URALL.PK shares by Suleiman Kerimov, a shareholder regarded as a primary driver of the company's new 'volume-over-price' strategy remain the focus of the markets. Any resolution of the political tensions between Russia and Belarus that emerged post BPC breakup would definitely be positive for the potash market but it is unlikely to materially reverse the negative industry trends particularly pricing. The much weaker potash price now seems likely for the medium-term at least. Likewise, pressure remains on phosphates. The negative guidance update by Mosaic (NYSE:MOS) also confirmed that weakness in potash is spilling over into phosphates, and higher prices are unlikely in the near-term.

(Click to enlarge)

Source: Google Finance

As you can see from the graph above; all three major North American fertilizer/potash stocks, Potash Corporation of Saskatchewan (POT), MOS, and Agrium (AGU), continue to be volatile. The stocks gained a strong short-term lift post the news in the WSJ that "Uralkali Would Consider Rejoining Belarus in Potash Pact".

Uralkali Deputy Chairman Robert John Margetts said "We are open to anything which we believe is legal and could be beneficial in distribution and costs," said Uralkali Deputy Chairman Robert John Margetts. "We're practical folk and we act in the interest of shareholders," said Margetts further.

However, the sentiment then dampened again on MOS's guidance cut. The company acknowledged the negative impact that the BPC break-up has had on near-term demand and pricing.

The uplift that was seen in the potash stocks before the recent fall again was mainly driven by a series of events that the market appears to see as supportive of potential reconciliation between Uralkali and Belarus. The most recent reports that have caught the attention of market are related to the potential change in ownership structure of Uralkali, more specifically the sale of a large stake of the Russian billionaire, Suleiman Kerimov, who is the main shareholder of Uralkali and is thought of the primary driver of the company's new volume over price strategy. Although it is unlikely that the prices would reverse materially, but if Kerimov sells his stake the threat of much lower prices and profitability for POT, MOS, and other players in the industry would largely disappear.

However, at the same time is very hard to determine the reliability of the news coming out of Russia and Belarus. The last few weeks have seen a number of contradictions. First there was a report by WSJ (10th Sep) that Norilsk Nickel would buy Kerimov's stake, then Reuters (11th Sep) published another report that Norilsk has no interest in Uralkali. The following day (13th Sep), Reuters published another report saying that Kerimov is selling his stake in Uralkali to a Russian banker Vladimir Kogan for $3.7 billion. In the midst of all this, potash prices continue to fall as a late harvest, Chinese inventory surplus, and a weak Indian rupee stifle demand expectations.

Arab Potash Cuts Production By 80%

Due to uncertainties in the markets and the consequential effect on demand, the Arab Potash Company (OTC:ABPZF) has also decided to cut potash output by 80%. The company's Acting General Manager William Flahr recently announced that the Jordanian company will operate at 20% of its total production for "the foreseeable future" to reduce inventories. Flahr further added that the company will return to operating at full capacity when potash markets support such decision. According to Citi Research this accounts for 500,000 ton reduction in supply. Additionally the company also signed a new three-year supply agreement with China to supply the Asian country with 600,000 tons of potash annual from 2014 to 2016.

The Bottom Line

The bottom line is even if ownership structure of Uralkali changes and Uralkali and Belarus reconcile, it will not necessarily lead to a quick path to a return of the cartel market structure. The near-to-medium term potash fundamentals remain challenged and with ample and uncertain geopolitical pressures and a steady stream of un-sourced speculation driving the industry we prefer to remain on the sidelines and in particular avoid POT and MOS.

Disclosure: I 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.