Uralkali potash JV breakaway rational, could impact on K+S: Analyst

LONDON (ICIS)–The decision by Russian fertilizer major Uralkali to break away from joint venture marketing cartel Belarusian Potash Company (BPC) is economically rational for the company but may be bad news for higher-cost producers such as Germany’s K+S, analyst Bernstein Research said on Friday.

Uralkali’s split from BPC, which it operated alongside Belarusian producer Belaruskali, is expected to drive down global potash prices as the company shifts to a higher-volume production model, with Bernstein forecasting prices will settle at around $350/tonne (€263/tonne) on a Vancouver free on board (FOB) basis.

The move has been politically explosive,  leading Belarusian authorities to arrest Uralkali CEO Vladislav Baumgertner in late August on accusations that he abused his power as an executive of BPC. The market response has also been seismic, with one potash company official likening the situation to the potash industry crash of 2009.

However, the move makes economic sense for the company, Bernstein said, as a low-cost, high-volume approach, while driving down the global price of the material, would allow the company to maintain profits.

“We maintain our view that Uralkali’s… decision is economically rational. Their low-cost position means they can cut prices, maximise production, and maintain gross profit,” Bernstein said.

The market shift may also prove to be a healthy one for the sector as a whole in the long-run, Bernstein added, as falling costs will leave the sector less attractive to new entrants, allowing incumbents to maintain control.

“Lower potash prices, which will deter new entrants, are better for the industry in the long run,” the analyst added.

However, the shift to a higher-volume model may not prove to be as good news for higher-cost players, which are likely to see margins squeezed.

Bernstein stated that German agrochemicals producer K+S could see its earnings and share price valuation “severely” impacted by Uralkali’s move, estimating that a potash price fall to $350/tonne Vancouver standard MOP would reduce its K+S valuation to €15 per share, while a fall to $300/tonne Vancouver standard MOP would cut its valuation to €7 per share.

However, more resilient potash pricing of around $400/tonne Vancouver standard MOP is likely to lead to Bernstein’s valuation for the company rising to around €25 per share. K+S stock was holding at around €21.44 per share in early Friday trading.

“K+S is a high-cost producer and most negatively impacted by price declines,” said Bernstein. “We see further risks – lower priced potash deals, a dividend cut, and a possible exit from the DAX index – with few mitigating factors,” the firm added.

In an update this week, Uralkali ruled out speculation that it would return to BPC. K+S said in late August that it is to adopt a cost-cutting plan, adding that it is difficult at present to predict where potash prices are likely to stabilise, but tougher times are likely ahead.

($1 = €0.75)