A Holiday Miracle for Fertilizer Stocks

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Friday brought great news for fertilizer investors, particularly those of the potash persuasion. Alexander Surikov, Russian ambassador to Belarus, said in a press conference that "Uralkali is ready to restore cooperation with Belaruskali", which should signal the return of the mighty Belarusian Potash Company. In case you don't keep up with the business politics between Russia and former Soviet states, here's the lowdown:

The Belarusian Potash Company (BPC) is a potash cartel formed by the cooperation of Russian potash company Uralkali and its Belarusian counterpart Belaruskali, similar to the West's Canpotex, a potash group formed by Potash Corporation of Saskatchewan (NYSE: POT  ) , Mosaic (NYSE: MOS  ) , and Agrium (NYSE: AGU  ) . Together, the two "marketing partnerships" -- control about 70 percent of global potash sales, and they are able to use that dominance to keep potash prices higher than they might otherwise be.

In July of this year, however, BPC broke up when Uralkali accused Belaruskali of trading outside of their joint agreement. The Prime Minister of Belarus then invited Uralkali's CEO to Belarus for a "discussion" of the matter, and promptly had him arrested for abuse of power. Russia responded with various trade restrictions against Belarus, but two billionaires eventually bought roughly half of Uralkali's stock, installed a new CEO, and Belarus extradited the former CEO to Russia where he is now under house arrest. Talk about drama!

The effect of the BPC breakup has been a sharp drop in global potash prices, as well as the stock price of companies involved in the potash trade -- i.e., Canpotex components. Canpotex alone only controls about 40% of the market, a big slice but not enough to keep prices higher on its own. PotashCorp, for instance, saw 30 percent lower potash volumes in its most recent quarter compared to last year, and Mosaic's volumes were 22 percent lower. Amazingly, Agrium increased domestic volumes by over 50 percent, but even that feat was largely undone by lower sales prices.

POT Chart

POT data by YCharts

So what now?
If the Russian ambassador is right, and Uralkali and Belaruskali are going to resume their partnership soon, that will be just as much of a boon to potash prices as their breakup was a blight. There will still be lingering effects from the uncertainty the situation created. Potash buyers delayed purchases in the wake of the breakup, expecting prices to continue dropping, and that will likely continue until the reunion is in full swing. Even then, if this could happen once, buyers might expect it to happen again.

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9/27/2016 1:24 PM
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