As with most stories about major commodities these days, the collapse of one of the world's dominant potash cartels has the inevitable China angle.
Russia-based Uralkali, the world's largest producer of potash, a key agricultural fertiliser, withdrew last week from its partnership with Belaruskali after accusing the Belarusian state-owned company of selling potash to China and India outside of their preset price and volume.
Uralkali promptly announced it had cut its own deal with an unnamed Chinese buyer, probably at a significant discount to the current market price of about US$400 per tonne. During the food crisis in 2007 and 2008, prices almost hit US$1,000 per tonne. The price plunge explains why potash producers are losing cartel discipline and making deals alone to make up for lost revenues. The Russian-Belarusian divorce is putting enormous pressure on the other cartel, the North American Canpotex, made up of a handful of Canadian and American producers, to ease prices and crank up production. Right now, Canpotex is keeping mum, but if it breaks up too, that will spell the end of the potash world as traders and farmers have known it for decades.
That may be bad for the cartels' companies and their shareholders but excellent news for the rest of the world. Together, the duopoly controls more than 70 per cent of the world's potash supply. Their break-up will inevitably cause a further plunge in prices. That will be a boon for farmers, especially those in developing countries with a large population such as India and China. For that reason, Uralkali's shock announcement last week caused the share prices of most potash companies to drop by more than 20 per cent in a matter of days.
In the past decade, the rise of China and the commodity super-cycle turned potash, once a boring commodity trade, into a darling of Wall Street. A bet on the potash producers, considered a proxy on the super-cycle, was almost guaranteed profit. But all good things come to an end. Traders and analysts now warn prices may hit US$300 a tonne. A report by the Bank of Montreal estimates that many existing and potential potash mines are economically viable only at US$400 to US$450 a tonne. The latest development may herald a period of industry consolidation, more streamlined production and lower prices. That's why the world should welcome the cartels' collapse.