Demise of potash oligopoly could hit K+S earnings hard: analyst

01 August 2013 By: Will Conroy

LONDON (ICIS)--The exit of Russia’s Uralkali from the Belarusian Potash Company (BPC) potash export group could lead to a big fall in earnings for Germany-based global fertilizer and salt products producer K+S Group, a Wall Street research firm said on Thursday.


While Uralkali’s withdrawal from the BPC partnership it ran with fellow potash producer Belaruskali – which puts an end to the BPC/Canadian Potash Exporters (Canpotex) oligopoly that has around 70% of the $20bn (€15bn) world potash market – is a “good, rational business decision”, it could hit K+S earnings hard, Bernstein Research said.


In a note to investors, Bernstein Research senior analyst Jeremy Redenius said that following Uralkali's recent announcement to break from the BPC export group, "we estimate potash prices will fall to $350/tonne FOB [free on board] Vancouver in our base case. As a result, we expect K+S' earnings to nearly halve by 2014 and lower our target price to €15 [per share]".


He said K+S' potash earnings are highly dependent on the export groups – Belarusian Potash Company and Canpotex – "holding potash prices well above the marginal producer's cash costs of about $300/tonne. The break-up of BPC threatens to drive potash prices toward this level".


Over the past few years, the export groups had been able to hold prices of the potash crop nutrient – currently near $400/tonne FOB Vancouver – at a level well above K+S' cash cost of around $275/tonne delivered, Bernstein Research said.


Uralkali’s exit would allow the company to use its low cost position to cut prices to about $350/tonne, ramp up production, and maintain gross profit.


“Moreover, we estimate prices around $350/tonne will deter the new entrants,” said Redenius, backing up comments from other analysts who have questioned whether projects such as miner BHP Billiton’s $14bn investment in creating the world’s largest potash mine by 2017 in western Canada will now go ahead.


He said Bernstein had written before about the industry needing to lower prices in the near term to dissuade new entrants that threatened the groups' control in the long run. "High prices have led to attractive investment economics and a long list of potential new entrants. We think price decreases now will leave the incumbents better off in five years,” he said.


After analysing the Uralkali pull-out from BPC, Moody’s Investors Service concluded that it would create price and margin pressure for global potash producers and was credit negative for the potash industry.


“The dissolution of the export joint venture and Uralkali’s plans to increase production will lead to lower and more volatile potash fertilizer prices ahead of negotiations with the largest customers, China and India,” Moody’s said.


"While we expect a lot of price volatility in the next two quarters, in the longer term we expect that the four largest producers – Uralkali, Belaruskali, the Potash Corporation of Saskatchewan (PCS) and Mosaic – will act to maximise profits and restore much-needed discipline to the market, which will allow potash prices to recover over time, albeit at a level that will probably be lower than the level in the first half of 2013 of $375-$400/tonne,” it added.   ($1 = €0.75)


Request a free sample of ICIS pricing report for fertilizers >>
Sign up for FREE market updates from ICIS >>