Russian potash producer Uralkali reached a pricing agreement Monday with Chinese fertilizer importers for the first half of 2013 at $305 per metric tonne, and though that represents a 24% discount to the levels paid a year ago, it should provide a measure of stability to the market that allows it to recover.
Ever since Uralkali ended its distribution agreement last July with Belaruskali, its joint venture partner in Belarusian Potash Corp., a cartel that controlled roughly 43% of global potash exports, the market for the key fertilizer was thrown into turmoil and caused its price to plunge from the near-$400-per-tonne level it had been trading at midsummer. It was seen as a bid by Uralkali to gain greater market share through higher production levels for the low-cost producer of potash.
Other global producers, particularly those of the North American marketing group Canpotex, saw their stock prices collapse as well as the move ushered in a period of uncertainty. PotashCorp (NYSE: POT) and Mosaic (NYSE: MOS), which count on potash sales for a significant portion of their operations, tumbled 17% in one day, but ultimately went on to lose as much as a quarter of their market value at their lowest points. Agrium (NYSE: AGU), the third owner of the trio that runs Canpotex but is also a more diversified producer than its peers (potash production counts for less than 15% of its revenues, relying instead upon nitrogen products for about half of its sales), did not suffer a similar rout. Smaller players not part of the marketing agency, and thus without the same muscle to negotiate prices as their larger brethren, felt the pain of the breakup more keenly. Intrepid Potash (NYSE: IPI), for example, plunged 30% in one day.
Although it means the fertilizer component will trade at levels that are just a third of the peak price they hit just before the global recession, the current price was not unexpected and the uncertainty surrounding what China would do has been removed. It should set a floor from which global potash producers can grow.
Moreover, U.S. demand is expected to remain solid given the expected rebound in North American crop yields last year, which should have led to nutrient depletion for all three key fertilizer ingredients. And with minimal retail inventory levels, they'll need to restock supplies, ensuring that producers should be able to make up some of the profits lost from the pricing collapse through volume. Certainly, the lower prices should spark greater demand from farmers.
Shares of Canpotex members have regained 20% or more of the value lost in the days after BPC's breakup, and because the market had already priced in expectations of a $300-per-metric-tonne level, there shouldn't be any upheavals as a result and it's why I anticipated PotashCorp and the others would be candidates for a greater rebound. And if BPC manages to put itself back together again, not a completely unlikely possibility, 2014 could be viewed as the year they catapult themselves to new, higher levels.