The world of potash has been on one wild ride this month.
Soon after my last update, Indian potash tender bids were all reported to have come in right around $625 per metric ton (known as a tonne in the Queen's English), rolling flat from the previous year. Well, almost all of the bids. Results remained unknown for Russian producer Silvinit, one of the big seven potash exporters.
By the end of the following week, it was confirmed that Silvinit had followed in the footsteps of BPC and Europe's K+S, and broken ranks with its peers. The firm agreed to sell 850,000 tons of potash to India for $460/tonne. Guess what that's done to the bargaining power of the rest of the group?
There's no need to guess. Canpotex -- the Canadian triumvirate of PotashCorp (NYSE:POT), Mosaic (NYSE:MOS), and Agrium (NYSE:AGU) -- reported today that it, too, will supply potash to India at $460/tonne. Such is life as a member of an increasingly creaky global cartel.
Opinions are divided on whether this break by Silvinit represents a lack of production discipline. VTB Capital, whose analysts nailed the Indian price cut, says no; it points to liquidity factors unique to Silvinit that forced the firm's hand. Merrill Lynch analysts also noted Silvinit's price-cutting behavior in previous years. Ultimately, it's not a particularly important debate. Global potash prices are headed south, no matter what.
So what does this mean for PotashCorp and Mosaic, both of which just reported soft second-quarter earnings alongside fellow fertilizer firm Terra Industries (NYSE:TRA)? Actually, they seem pretty upbeat, apparently assuming that the India contract has put a floor in for potash prices going forward, which should loosen up the market.
This price reset could actually be a positive thing for the fertilizer players in several other ways, beyond moving product and reducing bloated inventories. First, lower prices have to help reduce the resentment clearly felt by the farm community toward these fertilizer barons. Second, prices may just hit a sweet spot wherein the incumbent producers are soundly profitable, while new entrants find the economics of new mine construction unattractive. Such developments could really extend these potash producers' enviable market positioning.
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