China has bought a chunk of one of the world’s largest potash producers, giving the Asian country more control over what price it should pay for the fertilizer – a move that could drag down prices for the mineral and eat into profits for Canada’s potash companies.
China Investment Corp., Beijing’s sovereign wealth fund, agreed to acquired a 12.5-per-cent stake in Russia’s OAO Uralkali. The deal – a debt-for-equity exchange between CIC and a company owned by three Russian oligarchs – comes after Uralkali said it intends to break from Belarus Potash Co., the cartel it had with state-owned Belaruskali.
Companies controlled by Beijing have invested billions of dollars as part of an overall strategy to secure energy supplies as well as basic manufacturing and building materials. In Canada, Chinese oil and gas companies, along with CIC, are significant energy players. CIC’s deal with Uralkali fits the recent Chinese model: Invest in resources in order to secure supply and exert some control over prices.
China is the world’s most populous country and largest potash consumer, and its stake in Uralkali could hurt Canada’s fertilizer producers because they could further lose pricing power.
CIC’s investment in Uralkali gives Beijing a better idea of what would be a fair and competitive price for potash. Canpotex Ltd., the overseas marketing arm of Potash Corp. of Saskatchewan Inc., Agrium Inc. and Minnesota’s Mosaic Co., along with the crumbling joint venture between Uralkali and Belarus, have had tremendous influence over potash prices and supply as they control, collectively, 70 per cent of the world’s potash market.
“If they are an owner and a buyer, it will probably moderate some of the price spikes,” said Laura Lau, a senior vice-president at Brompton Funds in Toronto. “It is not good for Canada, that’s for sure.”
Uralkali’s biggest rival, Potash Corp. called China’s purchase a “non-event” without direct implications for potash sales.
“I can’t imagine there would be any associated transactions with this thing that would impair the valuation of the remaining [shares of Uralkali],” Potash Corp. chief financial officer Wayne Brownlee said at a conference in Toronto. “It just doesn’t make sense to me from a business basis, and so I think this is purely a passive investment at this stage.”
CIC’s stake in Uralkali could hit about 14 per cent, once the Russian company fulfills its pledge to buy back about 12.4 per cent of its shares.
Uralkali said the transaction was agreed to by the Chinese fund and the potash producer’s shareholders.
“We don’t have information on whether CIC plans to get a seat on Uralkali’s board,” Alexander Babinsky, a spokesman for the Berezniki, Russia-based company, told Bloomberg by e-mail. “We plan to ask our new shareholder very soon about its plans.”
China and Russia already have relationships built around resources. China has, in recent years, increased efforts to secure its needs for natural resources from Russia, in one case lending $25-billion (U.S.) to Russia’s state oil major Rosneft and pipeline monopoly Transneft, secured against long-term oil supplies.
Uralkali in July said it wanted out of its joint venture with Belarus’s state-owned producer Belaruskali. This rankled relations between Russia and its neighbour. Officials in Belarus arrested Uralkali chief executive officer Vladislav Baumgertner after talks with Belarus’s prime minister in August.
Uralkali can ship to its Chinese customers by rail, and analysts at Bank of Nova Scotia noted in August the spot price for potash at the Russian border had begun to drop. Uralkali, observers argue, is willing to increase the amount of potash it sells in exchange for lower prices.
With files from Reuters and Bloomberg News