It's been a tumultuous year for potash producers, the handful of companies that make one of the key fertilizer ingredients. Where the breakup of the Belarusian potash cartel in July is the immediate cause of depressed pricing for both the fertilizer ingredient and shares of its producers, as PotashCorp (NYSE:POT) highlights, they were experiencing competitive pricing pressures right up to the point when Uralkali dissolved its partnership with Belaruskali.
Potash prices were falling long before the cartel's demise, as high inventories in key markets reduced new sales. It's believed Uralkali left Belarusian Potash in a bid to gain more share for itself, and that's caused Belaruskali to offer steep discounts in India ever since. With China still the straw that stirs the potash drink -- it typically sets the lowest floor on potash prices because of its greater use -- producers are expecting the weakness to be further compounded come 2014.
Potash production is limited to just 12 countries, with Canada controlling more than half the world's reserves. While BPC, before its disintegration, controlled some 40% of the global supply, Canpotex, the North American marketing organization jointly owned by PotashCorp, Agrium (NYSE:AGU), and Mosaic (NYSE:MOS), still produces between 30% and 35% of it.
Aside from China and India, another key market is Brazil, which imports 90% of its potash needs. The Latin American economic leader wants to reduce its dependence on foreign potash suppliers by developing its own resources, giving iron ore miner Vale (NYSE:VALE) the opportunity to advance its Carnalita potash project, which is thought capable of producing as much as 15% of Brazil's domestic needs. Having had to walk away from its Rio Colorado project in Argentina earlier this year, Vale believes it can make up some of the volume from Carnalita as well as its Saskatchewan Kronau project, where it could realize production levels of some 3 million to 5 million tonnes of potash a year.
Yet with a sizable stake of its own in Chemical & Mining Co. of Chile, and a desire to either acquire it whole or establish a majority position, PotashCorp can also have greater access into the important Latin American market if need be.
Supply then is the other factor that could influence results, and BHP Billiton (NYSE:BHP) holds exploration rights to more than 14,500 square kilometers of potash at its Jansen project in the Saskatchewan for which it's actively seeking partners. It has an expected output of 8 million tonnes a year for the estimated 70-year life of the mine, but, despite having recently committed another $2.6 billion to its development, the potash market turmoil will likely cause BHP -- along with others -- to pull back the reins on developing new mines.
Cheap natural gas makes production more profitable in the U.S., which drove many producers to add to capacity. CF Industries, for example, is planning expansion in Louisiana and Iowa. PotashCorp, as the world's single largest producer with the capacity to produce more than the world currently needs, also has the wherewithal to cut production at will. This month it announced it was doing just that, along with eliminating 1,000 jobs to blunt the impact Uralkali's rogue maneuvers were causing. This follows Agrium's earlier decision to suspend engineering work on a proposed $3 million plant in the U.S. Midwest, and Mosaic's delay of the final stage of a $2 billion expansion in Canada.
Although Uralkali defends its actions by saying lower prices will spike demand, PotashCorp counters that the market is at an inflection point. While some hangover from the recession has caused the industry to run flat for almost six years, if you exclude India from the equation, the market's actually growing. India has been in a demand deficit for three consecutive years, a position that's not sustainable.
This is the key, then, for PotashCorp. While the industry as a whole will benefit from India spurring new demand, PotashCorp, as the low-cost producer, can survive longer and more profitably than many of its rivals. Its average costs of goods sold per metric ton is just $133.
The market's pretty much priced potash in the $300 per tonne range for 2014, so if China sets next year's that low it shouldn't cause any additional upheavals. Investors ought to look for increasing volumes along with a stabilized price that will ultimately lead to PotashCorp witnessing a recovery in its valuation.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and 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.