In a stunning move expected to transform the landscape of the world's fertilizer industry, Russia's OAO Uralkali is dismantling one of the world's largest potash marketing groups by striking out on its own.
Shares in North American producers of potash plunged in morning trading on news of an anticipated steep fall in global prices of the fertilizer ingredient on anticipation that Uralkali will now sell its product at a discount and the world supply will increase.
Potash Corp. of Saskatchewan Inc.'s stock plummeted $8.90, or 23 per cent, to $30 on the Toronto Stock Exchange. Shares in Agrium Inc. were off $4.95 or about 5 per cent to $88.89.
In the U.S., Mosaic Co. shares fell $12.12 (U.S.), or 23 per cent, to $40.93.
Investors are reacting to the decision by Russia's Uralkali to pull out of one two global potash cartels, the Belarus Potash Company (BPC).
Uralkali said it expects the move will result in the fall of global prices by 25 per cent.
BPC – a partnership between Uralkali and Belaruskali – will be broken up, leaving North America's Canpotex as the dominant global potash export partnership; Canpotex includes Potash Corp., Agrium and Mosaic.
BPC and Canpotex combined represent about 70 per cent of the global potash market.
In a research note headlined "The End of the Potash World as We Know It," BMO Nesbitt Burns analyst Joel Jackson said the traditional disciplined approach to selling potash on the part of BPC and Canpotex appears "to have crumbled, and we expect a major exit by investors out of potash producers and the fertilizer sector in general following a stunning announcement by large Russian low-cost potash producer Uralkali to change its strategy to volume-over-price and to market by itself."
Investors will likely now question why potash producers still deserve historical premium multiples over diversified miners, he said, estimating that global price estimates could fall by $100 (U.S.) per tonne.
A spokesman for Potash Corp. told The Canadian Press the Saskatchewan company is still studying what happened, while an Agrium spokesman pointed out to Bloomberg that "this is not the first time that Russian producers have had disagreements."
Mosaic's chief financial officer also questioned events, according to Reuters: "It seems there's a feud under way between Uralkali and Belaruskali and the rest of the industry's caught up. We're still trying to sort out what Uralkali intends to do, which may be different from what it says it will do."
Uralkali said its decision to pull out of BPC came about after the failure of efforts to break a deadlock over sales.
"This move breaks the potash duopoly with potash prices most certain to decline in the near-term causing us to lower our earnings estimates and target price [of Potash Corp.] to $36 (from $46) resulting in a recommendation downgrade to hold (from buy)," Cantor Fitzgerald analyst Peter Prattas said in a research note Tuesday.
BPC said the pullout may lead to potash prices falling to below $300 per tonne in the second half of 2013, from about $400 now.
CIBC World Markets analyst Jacob Bout asked in a research note whether Uralkali is really that intent on breaking up the "potash oligopoly."
"Likely this announcement is a ploy by Uralkali to force Belaruskali (the other part of BPC) to a settlement under Uralkali's terms," he said.
With the potash industry currently in a 15-per-cent to 20-per-cent oversupply situation, it doesn't make much sense for Uralkali to risk breaking up the current system "for a few more tonnes of market share," he said.
Uralkali risks seeing its profit margins fall precipitously if the price of potash drops significantly, he said.
"The worst-case scenario is that Uralkali believes the potash industry is truly broken (that is, supply/demand fundamentals will not come into balance without lower prices) and is looking to grab market share (which would be very bearish for the potash industry)."
Uralkali chief executive Vladislav Baumgertner said on Tuesday that he expects competition to ramp up, meaning that prices will go down.
In a note to clients on Tuesday, RBC Economics Research cautioned that a major decline in the price of potash could hurt the Canadian and Saskatchewan economies.
"These developments are not inconsequential to the Canadian economy as the province of Saskatchewan has the world's largest reserves of potash," said RBC Economics assistant chief economist Paul Ferley.
"Potash mining accounts for about 2 per cent of the Saskatchewan economy and the province represents about 4 per cent of the Canadian economy, he said.
The two areas that would be hit hardest in Saskatchewan are mining and construction.
If there are double-digit production declines in potash for the rest of 2013, Saskatchewan GDP would be reduced by one percentage point – resulting in no growth for the entire year, he said.
RBC Economics' current GDP growth outlook for the province is 2.9 per cent.
"Lower potash prices could have an additional impact on the Canadian economy via a downward impact on the Canadian dollar," said Mr. Ferley.
"On net, with the magnitude of today's news on the Canadian and Saskatchewan economies along with the Canadian dollar hard to quantify exactly, the direction of the impact is clearly downward."
BMO's Mr. Jackson said the industry might actually be better off once the short-term damage is done, with improved sales volumes and the cancellation of proposed new projects – notably BHP Billiton Ltd.'s $14-billion Jansen potash project in Saskatchewan.
BHP has not committed to Jansen as it holds back on approval of new capital spending amid continued economic uncertainty.
Potash producers such as Saskatoon-based Potash Corp. currently have their hands full trying to deal with tough market conditions that include reduced Chinese demand, falling corn prices and high global potash supply.
Last week, Potash Corp. cut its earnings outlook for the year.