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An entry to the tunnels is seen at Nutrien's Cory potash mine near Saskatoon, Saskatchewan, Aug. 12, 2019.

STRINGER/Reuters

Pro-democracy protests in Eastern Europe are helping to boost the outlook for Saskatchewan’s potash miners. Investors who fled the bad-news sector in recent years may want to take a fresh look at the situation.

Shares of Nutrien Ltd., Mosaic Co. and other companies with potash mines in Canada have bounced higher over the past month. The jump reflects improving fundamentals in the fertilizer industry. It also reflects geopolitical turmoil – in particular, the decision of many Belarussians to walk off their jobs as part of mass demonstrations aimed at toppling the country’s long-time dictator, Alexander Lukashenko.

The protests matter to Canada’s potash miners because Belarus produces a fifth of global potash exports. Continued chaos in Belarus could disrupt the country’s potash production in the short-term and lead to higher potash prices over the long-term if the country’s state-controlled mines are restructured.

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“If the Belarus situation leads to political changes and state-owned enterprises are privatized, it is likely that global potash markets could tighten meaningfully,” Jacob Bout of CIBC World Markets wrote in a note this week.

A tighter market, with higher prices, would offer a dash of much-needed relief for potash producers. The price of their signature product has slid from more than US$800 a tonne in 2009 to less than US$300 in recent years.

The fundamental problem is too much supply of the crop nutrient. High prices a decade ago encouraged a flurry of investment in new mines. The flood of fresh output from those mines has overwhelmed slow growth in demand. With corn and soybean prices near multiyear lows, farmers have little incentive to invest more in fertilizers.

Meanwhile, the demise of cozy marketing arrangements has deepened potash producers’ pain. The sector’s cartel-like structure, which once helped put a lid on production and maintain high prices, came to an end in 2013 with the breakup of the joint exporting agreement between Russian producer Uralkali and Belarusian producer Belaruskali.

Uralkali accused Belaruskali of selling potash outside their arrangement and decided to go it alone, leading to a new era of vicious price competition. At the time, Joel Jackson of BMO Capital Markets called the breakup “the end of the potash world as we know it” and he was right.

Potash Corp. of Saskatchewan Inc., Canada’s pre-eminent producer, never fully recovered from the blow. It agreed in 2016 to merge with Agrium Inc. of Calgary to form Nutrien. The merger took effect at the start of 2018, but failed to ignite much enthusiasm among investors. Shares that were trading at more than $75 in October, 2018, began this year just a hair above $60. (Full disclosure: I hold Nutrien shares in my personal portfolio.)

The tumult in Belarus could be the jolt the sector needs. Fitch Ratings said in a note on Tuesday that global potash producers, including Mosaic, may benefit in the short-term from lower Belarusian exports.

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The longer-term implications may be even more encouraging. Mr. Bout of CIBC says “much will centre on the nature of Russia’s future involvement in the country.” One possibility would be a revival of the joint marketing venture between Uralkali and Belaruskali and renewed attention on throttling back output growth to help support higher potash prices.

To be sure, that outcome is far from certain. In a worse case, even more production could soon be flooding into the market. BHP, the Anglo-Australian mining giant, has spent years mulling whether to go ahead with its massive Jansen potash project in Saskatchewan. It recently decided to defer a final investment decision until mid-2021.

Until Jansen’s fate is clear and the outcome of the Belarusian uprising is decided, investors are likely to remain wary of potash stocks. But the balance of probabilities does appear to be shifting slowly in favour of the sector.

Nutrien, in particular, impressed analysts with a solid quarterly report earlier this month. Andrew Wong of RBC Capital Markets gave it an “outperform” rating with a US$48 target price – well more than the US$38 range where it is now trading in New York.

Mr. Jackson of BMO also rates Nutrien as an outperformer, with a US$50 target on the stock price. For his part, P.J. Juvekar of Citi labels it a “buy” with a US$45 price target because of “improving commodity fundamentals.”

Investors who like the company’s nearly 5-per-cent dividend yield, and don’t mind betting on the uncertainties of Eastern European politics, may want to pay attention.

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