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August 27, 2013 4:04 pm
It’s just one damn thing after another in the fertiliser business. Uralkali, the world’s biggest potash producer, pulled out of a marketing arrangement last month that had put a floor under the commodity’s price for eight years. On Monday, Vladislav Baumgertner, Uralkali’s chief executive, was detained in Belarus (Uralkali’s jilted partner was its Belarusian sister company). It appears that the potash sector is not about to return to the status quo ante. This has far-reaching earnings and valuation ramifications.
Uralkali’s decision to walk away from its marketing arrangement (read cartel) with Belaruskali was an attempt to up-end a longstanding price-over-volume strategy. As one of the lowest-cost producers, Uralkali has a lot to gain by ramping up production. Mr Baumgertner said (before his detention in Minsk) that he expected the price of a tonne of potash to fall from $400 to $300 by the end of this year as a result of the collapse of the cartel.
The immediate hit to valuations from Uralkali’s move appears to be over. Shares of Germany’s K+S, one of the highest-cost producers of potash, fell as much as 40 per cent; PotashCorp of Canada was down nearly a quarter; as were Uralkali’s London-listed shares. But they have recovered a bit: K+S is up 20 per cent from its lows. But given that earnings are tied to the potash price, and that the potash price may already be starting to subside, that recovery looks a bit premature.
Potash producers need to re-examine the business case for big new projects. K+S is developing the Legacy project in Saskatchewan; the company insisted at its half-year results that it was on schedule. BHP Billiton is spending $2.6bn to take development of its Jansen project, also in Canada, a step further (production is not expected before 2020). And Brazil’s Vale is looking for new production sources.
If the price of potash – a low-margin, bulk product – tumbles, it will affect the earnings potential of these projects. It is a good reason for producers to be more careful spending their shareholders’ money.
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