Don't Count out North American Potash Producers

In July last year, Russia's Uralkali walked out of a marketing partnership with Belaruskali, breaking up one of the two joint marketing ventures in the potash market. The breakup of the Belarusian Potash Company (BPC) export consortium pushed share prices of companies in the other consortium, Canpotex, sharply lower. The major concern was that the breakup of the arrangement would push potash prices below $300 per ton. Since then, potash prices seem to have found a floor. Additionally, Uralkali and Belaruskali might get back together after all. All these are positive developments for the likes of Potash Corp. (NYSE: POT  ) , Mosaic Co. (NYSE: MOS  ) , and Agrium Co. (NYSE: AGU  ) .

BPC
Along with Canpotex, which includes Potash Corp., Mosaic, and Agrium, BPC controlled 70% of the global potash market. BPC alone controlled 43% of the global market. It was therefore not surprising to see potash prices move sharply lower after the breakup of BPC.

The virtual duopoly had allowed Canpotex and BPC to maintain potash prices at profitable levels. But with one of the consortiums gone, there were fears that prices would fall below $300 per ton in the second half of 2013. Although that did not happen, investors remained bearish on shares of all three companies in Canpotex. Potash and Mosaic were particularly hit hard as they are less diversified than Agrium.

A floor for potash prices
Potash prices remained slightly above $300 per ton and have stayed at this level since the start of this year. More importantly, potash prices have found a floor.

Earlier this year, Uralkali entered into a new semi-annual supply deal with China, the world's largest consumer of potash. Uralkali agreed to sell potash at $305 per ton to China, down from $400 per ton in 2013. With the most important customer for potash agreeing to a price above $300 per ton, a great deal of uncertainty over pricing has ended for potash producers. Not surprisingly, shares of Potash Corp., Mosaic, and Agrium have bounced back, gaining 9.39%, 7.51% and 7.86%, respectively, since the start of February.

Uralkali and Belaruskali may get back together
Contributing to the gains in shares of Potash Corp., Mosaic, and Agrium has been speculation that Uralkali and Belaruskali may get back together after all.

One of the conditions set by Belarus president Alexander Lukashenko for a possible reunion of Uralkali and Belaruskali was the exit of Suleiman Kerimov, who held a controlling stake in Uralkali. That condition has been fulfilled, with Kerimov selling his controlling stake in Uralkali. According to the Financial Times, billionaire Mikhail Prokhorov's Onexim, which bought the stake from Kerimov, and Uralchem back restarting the partnership with Belaruskali. Onexim and Uralchem are the largest shareholders of Uralkali.

These reports certainly suggest that the partnership could be renewed. In fact, even Potash Corp. CEO Bill Doyle expects the two companies to get back together. Speaking at a conference in February, Doyle said that it was logical to expect Uralkali and Belaruskali to get back together.

The developments in Ukraine over the past month are another reason why the partnership could be renewed. In the wake of the Ukrainian conflict and especially after Crimea voted to secede over the weekend, Russia has been isolated. In such a scenario, Russia would want to strengthen ties with its neighbors. A deal with Belarus president over BPC would be one way to do it.

Worth investing?
Shares of North American potash producers were hammered after the breakup of BPC. However, as I noted, shares of Potash Corp., Mosaic, and Agrium have bounced since February as a great deal of uncertainty over pricing has ended. With the possibility of Uralkali and Belaruskali getting back together, North American potash producers are certainly worth a look.

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