Why Potash Producers Should Be Worried About This Development

Rio Tinto's entry into potash market would put pressure on prices and margins.

Jul 8, 2014 at 11:39AM

Potash prices tumbled last year following the breakup of the Belarusian Potash Company (BPC), which led to a bearish outlook for the potash market. The major concern was that prices would drop below $300 per ton, hurting the margins of major producers. However, the outlook for the potash market has improved since the start of this year as prices have remained resilient.

Indeed, last month, the outlook improved even further as Uralkali, which was responsible for the breakup of the Belarusian Potash Company, announced a production cut to support prices. But just as potash producers such as Potash Corp. (NYSE:POT) were growing in confidence, Rio Tinto (NYSE:RIO) and its partner announced that they would be moving forward with their potash project in Canada. Rio's entry into the potash market would put pressure on prices, albeit in the long-term. Still, the development is likely to worry potash producers.

Improved outlook for potash market
When Uralkali broke up its joint venture with Belarus last year, the biggest fear was that potash prices would drop below $300 per ton. Uralkali had walked out of the joint venture to increase its market share. While potash prices fell sharply after the breakup of BPC, they never fell below $300 per ton.

In fact, prices have been resilient. As I noted in an article back in April, Uralkali this year signed agreements with Chinese and Indian customers to sell potash at prices above $300 per ton. Canpotex also signed agreements to sell at prices above $300 per ton. Indeed, as I noted back then, the agreements meant that potash prices had a floor and ended a great deal of uncertainty over prices.

The outlook for potash market improved even more last month after Uralkali cut its production target for the year by around 8% in order to support prices. The company lowered its production target from 12 million tons to 11 million tons. Uralkali's CEO Dmitry Osipov noted that the company will continue to consider market conditions when weighing production levels.

Uralkali's surprise production cut proved that despite the breakup of one of the cartels operating in the potash market, producers were sensitive about prices.

The improved outlook even prompted Potash Corp. to rescind its previously announced layoff notices at its Penobsquis, New Brunswick facility. The company noted that given the ongoing tightness in the granular potash market, the temporary extension in operations will allow continued production from the Penobsquis mine. Not surprisingly, Potash Corp. shares have done well so far this year, gaining more than 14% year to date.

Rio's entry a worry
Just as the outlook for the potash market was turning robust, Rio Tinto and Russia's Acron OAO said that they are moving ahead with the development of the Albany potash prospect in Saskatchewan. In a statement released late last month, Acron said that the project area consisted of 1.4 billion tons of inferred resources, with recoverable amount at 329 million tons. According to Acron, the next steps for the project include continuation of environmental assessment and the pre-feasibility study.

Rio's rival and mining giant BHP Billiton (NYSE:BHP) also intends to enter the potash market. After failing to acquire Potash Corp., BHP Billiton invested in the Jansen project in Canada. The Jansen project is much larger than Rio's potash project in Canada. However, BHP has delayed production until at least 2020.

Rio's project is also not expected to come online in the near term, which would be a relief for potash producers. However, the entry of mining giants such as Rio and BHP Billiton is a major worry for producers in the long term as it will put pressure on prices and margins.

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool owns shares of PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers