File photo of a Potash Corp. operation.
Potash Corporation of Saskatchewan Inc.'s bid for German competitor K+S AG is a bold step by the world's largest fertilizer producer to reassert its control over potash prices as rivals encroach on its space.
The Canadian miner for years enjoyed a dominant position in the potash market, partly through its marketing arm, Canpotex. But that influence has been weakened as Potash Corp. faces growing competition at home and abroad, and a glut of fertilizer in the world.
Preferring to market their own product, companies such as K+S do not want to join Canpotex, the joint venture of Potash Corp. and two North American firms that sells potash outside of the continent. Canpotex's clout was diminished when Russia's Uralkali broke up a similar marketing venture two years ago. The two groups used to control 70 per cent of the potash market.
K+S owns the Legacy potash mine under development in Saskatchewan, where Potash Corp.'s biggest mines are located. Acquiring K+S would give the Canadian company control over Legacy and solidify its position as the world's leading producer. Combined, Potash Corp. and K+S would account for about 30 per cent of global production, according to analysts.
By owning K+S, Potash Corp. could shutter key mines as it sees fit, which would take supply out of the global market and allow the Canadian miner to regain some of the power it held over potash prices.
"Controlling K+S's high-cost German mine assets and the Legacy project could give [Potash Corp.] back the influence it seems to have lost," Joel Jackson, an analyst with Bank of Montreal, said in a research note.
K+S's Legacy, which is similar in size to Potash Corp.'s mines in the province, is expected to produce nearly three million tonnes of potash annually after it starts next year. In addition to the new Legacy mine in Saskatchewan, BHP Billiton is mulling whether to complete its large Jansen mine, which would dwarf Potash Corp.'s largest mine with eight million tonnes in annual production. BHP also will not join Canpotex.
Potash Corp.'s world was turned upside down when the Russian-Belarus potash cartel disbanded in 2013. Russia's Uralkali started pushing more potash onto the market at lower prices. The mineral's price plummeted, giving buyers the upper hand. Today, Potash Corp. and Uralkali are fetching around $300 (U.S.) a tonne. Before the cartel breakup, Canpotex and the Russian-Belarus venture could get upward of $400.
New sources of supply from Russia's EuroChem and others will also exacerbate the weak market conditions.
Analysts noted that the K+S deal carries risks for Potash Corp.
"We see the transaction as an expensive way to address the current industry overcapacity, where [Potash Corp.] first pays for capacity addition then pays again for possible reductions," Cowen and Co. said in a research note.
The Saskatoon-based miner has indicated it could go hostile, telling K+S's board it may decide to take its offer to shareholders. The deal is worth around €40 ($45 U.S.) a share and values K+S at nearly €8-billion.
Canaccord Genuity said the deal could help mitigate the soft potash market at the expense of the Canadian miner.
"If it spends $8.6-billion, only to kick the potash supply concern down the road, then it will have possibly spent that money in vain to support the market that has added future supply in the hands of some aggressive producers and it may end up with the same situation that the market is facing in two years," the bank said in a research note.
Potash Corp. will likely face antitrust hurdles should it proceed with its bid, analysts said. In 1997, Potash Corp. tried to buy 51 per cent of K+S, and the Germans blocked it on anti-competitive grounds.
K+S said it is evaluating Potash Corp.'s offer.
Rachelle Younglai