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A Potash Corp. operation.

Potash Corp. of Saskatchewan Inc., facing sharply lower demand in India and China, is setting the stage for a possible takeover of Israel Chemicals Ltd., in a politically sensitive move aimed at securing new markets for the world's biggest producer of the crop nutrient.

Potash Corp., the world's largest fertilizer maker, is looking to buy either all or a part of Israel Chemicals Ltd. (ICL), a $16.4-billion company in which it already owns a 14-per-cent stake.

"Discussions have occurred with Israeli government officials around potential options to increase our ownership stake in Israel Chemical Ltd.," Potash Corp. said in a brief statement, in response to news out of Israel that it was in merger discussions.

The politically charged talks have involved state officials including Israeli Prime Minister Benjamin Netanyahu, underscoring the importance of ICL – which holds mining rights to the Dead Sea – to the government, which has a golden share in the company.

A merger would put key state assets into the hands of the fertilizer giant at a time when its production capacity is growing but it needs to find new markets.

A merger would put key state assets into the hands of the Canadian fertilizer giant at a time when it is already targeting large organic capacity growth.

"The most serious hurdle to the approval of the deal is the public outcry that will arise if [Potash] gets control over Israel's natural resources, not to mention the worries regarding the environmental impact on the Dead Sea," Gilad Alper, an analyst with Israel's Excellence Nessuah Brokerage Services, said in a report.

A bid for ICL would be a stark role reversal for Potash from two years ago, when Canada blocked a hostile, $39-billion takeover bid by global diversified miner BHP Billiton Ltd. after the government declared potash a strategic resource.

Despite its heft in the booming agriculture industry, Potash has seen profits slashed for repeated quarters this year as key buyers in Asia held off on purchases.

Acquiring ICL would provide it access to clients in new areas such as Europe, while strengthening ties to Asia, where Chinese and Indian buyers are increasingly resistant to long-term supply contracts with Canpotex, the international marketing arm of Canadian producers that includes Potash, Mosaic Co. and Agrium Inc.

"They would be much more in control of placing their own material, their own final product, if they bought all of ICL," said John Hughes, an analyst with Desjardins Securities Inc. in Toronto. "Just by the mathematics, you get another 4.5 million tonnes that are being placed principally in Europe and you are at the helm in terms of the control of where that material is going."

ICL is the world's fifth-largest global potash producer and is not a part of Canpotex or its Russian counterpart Belarus Potash Co., the trading joint venture of Uralkali and Belaruskali.

"We believe a key rationale for [Potash] to control a larger or controlling stake in ICL would be to (eventually) secure marketing control of one of the two large potash producers (ICL and K+S) not part of the two main marketing organizations (Canpotex and BPC)," BMO Nesbitt Burns Inc. analyst Joel Jackson said in a research note.

Potash Corp. has already failed once to boost its ownership in ICL and Mr. Jackson suggested that news of the talks this week might come as the government gauges public reaction ahead of elections in January.

Potash tried in recent months to raise its stake in ICL to 25 per cent, but walked away amid anti-trust authorities' concerns it could weaken the position of domestic Israeli customers.

Israel Corp. Ltd., which controls 52.3 per cent of ICL, said on Wednesday that Potash Corp. has met with Mr. Netanyahu to discuss a merger between the companies, and that senior officers of the company accompanied the discussions.

"A deal in this matter was not reached and Potash has not yet approached the company or ICL in this matter," Israel Corp. said.