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The Belaruskali potash mine some 130 kilometres south of Minsk, Russia: The company has been accused of selling potash outside its agreement with partner Uralkali, which has announced it is going it alone.


The dramatic breakup of the world's largest potash oligopoly promises to reshape the industry and send prices tumbling, threatening the profit-making power of the marketing group that sells Saskatchewan potash to global customers.

Russia's Uralkali said it is walking away from its Belarus Potash Company (BPC) joint venture with partner Belaruskali in order to sell potash on its own to hungry markets in China and India. The move is expected to shatter the industry's supply-demand picture and spur a global potash price war.

It's also a serious blow for Canpotex Ltd., the potash marketing group made up of Potash Corp. of Saskatchewan Inc., Mosaic Co. and Agrium Inc. The shares of all three companies were hit hard; combined, they lost nearly $9-billion in stock-market value. Potash Corp., one of Canada's biggest mining companies, fell 16 per cent to $32.66. Analysts warn Canpotex's pricing leverage could soon disappear, clobbering profits for each public company.

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"This is a game-changer," said John Chu, an analyst at Alta-Corp. Capital Inc. "This seriously undermines what Canpotex and BPC have been doing. … The valuation premium that potash players typically enjoyed because of the leverage they had between the two groups dissipates if not disappears completely."

BPC and Canpotex account for more than two-thirds of global potash sales, with about 43 and 25-per-cent shares, respectively, according to recent estimates.

The two groups are often referred to as cartels because they have the power to negotiate similar prices with large buyers such as China and India, and to increase or decrease the supply of the crop nutrient to match demand and help steer prices.

That system could fall apart after a split between the members of BPC, with Uralkali claiming Belaruskali was making sales outside of its agreement. Uralkali said its Belarusian partner "destroyed the fundamentals of our prolonged fruitful cooperation." Vowing to increase production, Uralkali warned global potash prices could fall 25 per cent as a result, to under $300 a tonne by the end of the year.

That has consequences for Canpotex's ability to keep up its own pricing and could force changes to production levels.

"Canpotex is going to find it difficult to go it alone with only a 25-per-cent share of the export market," Mr. Chu said.

Potash producers have already pulled back on production to meet a drop in demand. Potash Corp. said recently it plans to operate its Cory, Lanigan and Rocanville operations at reduced rates for the rest of year, while Mosaic has also curtailed production.

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Just over half of Canpotex's volumes come from Potash Corp., the world's largest potash producer, followed by Mosaic with about 40 per cent and another 9 per cent from Agrium.

Canpotex members argue the marketing arm can survive any industry realignment.

"Circumstances have changed in the potash industry overnight," Mosaic chief financial officer Larry Stranghoener said on Tuesday.

However, he said Canpotex could survive because it's more than a selling group – it's also a distribution company that owns ports, rail cars and ships to get product to markets. "We think the value of Canpotex is intact and will remain intact."

Canpotex members were in discussions Tuesday about how to approach a new potash market if Uralkali sticks with its decision. There is some speculation that Uralkali's move is a tactic to get its BPC partner to better cooperate, and even to discourage BHP Billiton Ltd. , the world's largest miner, to shelve its plan for a massive new potash project in Saskatchewan.

"I don't think it means anything specific for Canpotex the organization," said Richard Downey, senior director of investor relations at Agrium. "It has obviously created a lot of uncertainty in terms of the potash market in the short term, but it really doesn't change the supply-demand fundamentals."

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Bill Johnson, senior director of public affairs at Potash Corp., said it was "business as usual" on Tuesday.

Cowan and Co. analyst Charles Neivert argues there will be an impact on Canpotex, "since we believe that the current structure of the group is not necessarily beneficial to all."

"It occasionally forces members to 'keep up with the Joneses,' since Canpotex's share is based on proven capacity," Mr. Neivert said in a note Tuesday.

A breakup of the potash industry oligopoly "doesn't make a lot of sense," CIBC World Markets Inc. analyst Jacob Bout said in a note, especially when the market is currently oversupplied by about 15 to 20 per cent.

While Mr. Bout thinks Uralkali's move may be a ploy, the "worst-case scenario" is that Uralkali believes the potash industry is broken, "which would be very bearish for the potash industry."

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