There are two ways to read Potash Corp. of Saskatchewan's announcement on Tuesday that it is cutting 1,050 jobs and tooling down some production.
The first is that demand from developing markets has been soft and that the cuts are necessary to reduce costs. Falling corn prices in the U.S. have also hit potash pricing, which typically moves in tandem with the grain.
The second way to read Tuesday's news is more interesting. The folks from Saskatchewan may be sending their Slavic rivals a message: "Pay attention to what we've done today. We want to end this little war we've been having, and so should you. Then we can return to normal, and get back to minting fat profits."
Remember that potash is predominantly mined in two areas of the world with massive subterranean deposits – Saskatchewan and a region spread out over the former Soviet Union. The three miners in Saskatchewan – Potash Corp., Mosaic and Agrium – have sold overseas for years through their jointly owned marketing organization Canpotex while Russian producer OAO Uralkali and Belaruskali, owned by the state of Belarus, had a similar joint venture called Belarusian Potash Co. or BPC.
The two groups have acted as cartels (a charge they dispute), doing everything possible to keep prices high. In the case of Potash Corp., that has meant slowing production to a crawl and throwing people out of work at times to protect prices by keeping supply tight.
Of course, such scenarios only work when the cartels play ball. But years of flat demand, increases to capacity from new or expanded operations, growing inventories and recently declining prices have increased competitive pressures on the two groups. This past summer, Uralkali bailed from BPC and cranked up production, sacrificing price to push for greater volumes.
Since then, the predictable has happened – price wars. Potash has changed hands for as little as $270 (U.S.) per tonne in Southeast Asia, about $100 per tonne below recent spot prices as Uralkali, Belaruskali and Canpotex battled it out. Canpotex wanted to show it would not let Uralkali gain one tonne of market share without a fight, BMO Capital Markets analyst Joel Jackson said.
But all is not set in stone in eastern Europe. Russian fertilizer producer UralChem is reportedly taking a 20 per cent stake in Uralkali. The buyer's CEO is Belarusian and has ties to the president of Belarus, who is none too happy that BPC is broken. The ownership shuffle could lead to a reconciliation between the BPC partners, although how that affects the potash market " is unclear," Mr. Jackson said in a note.
With Uralkali's ownership and strategy potentially in flux, Potash Corp.'s cuts to jobs and production clearly communicate to the Russians that it will not be dragged further into a game of sacrificing price for volume. It wants to return to holding prices in line by constraining supply and hopes its counterparts in Europe will follow suit, Mr. Jackson said.
Of course there's always the risk Potash Corp. gets neither the prices it wants nor the volume, and that Uralkali will continue to run its operations full out. A likelier outcome is that the smell of money will draw the fertilizer kings back into the cozy relationship they've enjoyed in the past for at least a little while longer.
Sean Silcoff