Break up of potash oligopoly will benefit NPK producers, says bank

31 July 2013 11:36  [Source: ICIS news]

LONDON (ICIS)--The break up of the Belarusian Potash Company (BPC)/Canadian Potash Exporters (Canpotex) oligopoly may benefit nitrogen phosphorous potassium (NPK) fertilizer producers that should see a downward adjustment in their potash feedstock costs, an investment bank said on Wednesday.

“Uralkali’s shift towards a volume-over-prices sales strategy has sent waves over the global potash market,” said Piotr Drozd, an analyst at Prague-based WOOD & Company, in a note to investors on the withdrawal on Tuesday of Russian Uralkali from the BPC export sales group, which it owns jointly with Belarus’ Belaruskali and the State Association of Belarusian Railways.

“The [consequent] break-up of the BPC-Canpotex oligopoly, controlling approximately 70% of the global potash market, suggests a sharp decline in global potash prices from the current $400/tonne [€300/tonne] levels to $350/tonne or below, according to consensus,” he added.

Uralkali said it decided to end its relationship with Belaruskali because of disputes over whether the Belarusian company was making deliveries outside of BPC, which was seen as controlling roughly 43% of global exports.

The declining potash prices that should result from Uralkali’s move to spark new competition could have a positive impact on, for instance, the profitability of an NPK producer such as Poland’s Zaklady Chemiczne Police (ZChP), assuming that NPK prices did not follow suit, the bank said.

However, Drozd noted that “in light of the softening fertilizer demand outlook, [the bank] believes the feedstock benefit may be largely forwarded to the end-clients, i.e., that NPK prices may, to some extent, adjust downward on the lower feedstock cost”.

ZChP, a subsidiary of Poland-based fertilizer group Grupa Azoty, consumed about 350,000 tonnes/year of potash, according to WOOD & Company estimates.

In 2012, ZChP spent around zloty (Zl) 485m ($152.0m, €114.7m) on potash, which translated into 21% of its energy and material costs, making it a the third-largest cost component, following natural gas (28%) and phosphate rock (23%), the bank calculated.

In February, ZChP announced a potash delivery contract worth Zl 179m with Uralkali - which from now on is to direct all of its export business through its Uralkali Trading division - and another with Belaruskali, worth Zl 268m.

ZChP did not disclose the pricing formula behind the contracts, which WOOD & Company estimated should cover all of its 2013 potash needs.

The bank, however, said it thought the price-setting mechanism may be based on quarterly or semi-annual revisions, which would delay the potential positive effect of the potash price cuts into 2014.

“With stable NPK prices and potash at $350/tonne, we estimate that the company’s savings could reach around Zl 60m annually starting from 2014,” Drozd said.

Offshore marketing group Canpotex comprises Saskatchewan potash producers PotashCorp, Mosaic and Agrium.

($1 = Zl 0.75, $1 = Zl 3.19, €1 = Zl 4.23)

By: Will Conroy
+44 20 8652 3214

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