A potash cartel – the largest in the world – has been broken up in Russia's Uralkali, and officials think the move will slash prices by 25 percent, heralding a reshaped industry and pummeling shares of companies that produce the key fertilizer ingredient.
The breakup of the Belarus Potash Company (BPC), a joint venture with Belarussian partner Belaruskali, could cause a price war and leave North America's Canpotex as the dominant potash export venture, according to Reuters.
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The potash cartel disestablishment could also lead to cancellations of projects by rivals as the industry weighs the effect of lower potash prices, but may feed through to better deals for farmers and ultimately consumers.
U.S.-listed shares of the Canpotex owners -- Potash Corp of Saskatchewan, Mosaic Co and Agrium Inc (Toronto: AGU.TO - news) - plummeted, cutting their market value by nearly $15 billion (9 billion pounds).
BPC and Canpotex had accounted for 70 percent of global trade in potash, and the duopoly had set identical prices in key markets such as China and India.
"In the last few years, BPC and Canpotex ... succeeded by raising potash prices much above their production cost," a senior official at a major Indian potash firm said, asking not to be identified because of the sensitivity of the matter.
"It hurt Indian companies, Indian farmers and the Indian government," the official said. "The break-up will limit their power ... Certainly this will bring down potash prices."
Uralkali is pulling out of the venture after reaching a "deadlock" over sales and will export potash via its Swiss-based Uralkali Trading, Chief Executive Vladislav Baumgertner said.
"In the near future we expect (global) competition to become stronger - that will push prices down," Baumgertner said.
The decision to quit BPC may lead to a fall in the global potash price to below $300 per tonne in the second half of 2013, from the current $400, Uralkali said. Lower fertilizer prices could mean rising demand from price-sensitive farmers in Asia.
"It is as if Saudi Arabia decided to leave OPEC - oil prices would fall immediately," said Dmitry Ryzhkov, equity sales trader at Renaissance Capital.
Shares of Uralkali, part-owned by tycoon Suleiman Kerimov, plunged more than 20 percent, prompting the Moscow bourse to suspend trading in the stock.
Shares of Germany's K+S, a rival fertilizer firm, sank 24.5 percent to a six-year low.
Potash Corp shares fell as much as 24 percent to a three-year low of $29.00. More than 8 million shares changed hands by noon, making it their heaviest day of trading in nearly three years.
Mosaic shares plunged as much as 25 percent to $39.95, also a three-year low, on trade of 4 million shares -- their heaviest day in two years.
Shares of Agrium, which focuses more on nitrogen production than potash, sank as much as 8 percent in early morning trade before recovering most of their losses. Intrepid Potash Inc (NYSE: IPI - news) shares plummeted 35 percent to an all-time low of $12.71.
Uralkali will now look to boost sales to retain its dividend policy. It plans to boost potash sales to 13 million tonnes in 2014 and 14 million tonnes in 2015 from 10.5 million tonnes this year by expanding market share in China, India and Brazil.
It plans to export more than 2.5 million tonnes to China this year, mainly by rail - up from 2 million in 2012.
However, it will be harder to win business in India as companies there have already signed import deals for 4 million tonnes, said a senior official at state-run Rashtriya Chemicals and Fertilizers Ltd, declining to be named.
The price fall could cause new potash projects to be delayed or cancelled, Raffeisenbank analyst Konstantin Yuminov said.
Miner BHP Billiton has plans for a project in western Canada, which would be the world's largest potash mine if it opens as scheduled in 2017.
BHP is expected to take a decision on the $14 billion Jansen project in its next fiscal year. Rival industry executives have questioned the project's profitability at current price levels.
BHP declined to comment on the impact of Uralkali's move.
Uralkali said it would delay its Polovodovsky mine, which would cost an estimated $2.4 billion to build and increase its capacity by 2.5 million tonnes. Other projects cancelled or delayed include the $6 billion Rio Colorado potash project in Argentina, which Brazilian miner Vale quit this year.
The BPC news came days after Uralkali announced that shareholder Alexander Nesis had sold his 5 percent stake. Uralkali said it would freeze its buyback programme due to likely volatility in its stock.
One industry source said Canpotex had been marketing prices aggressively earlier this year, while BPC held back.
"Canpotex ... managed to increase its global market share by 24 percent at the expense of mostly BPC," the source said. "The Russians are now waking up and realising they need to change their game."
Uralkali, with costs of around $60 per tonne, said global prices were likely to be kept above $200 per tonne, supported by European and North American operators that have higher costs.
Potash is the main export product for Belarus, Russia's staunchest ally among the former Soviet republics whose economy is stagnating after a financial crisis in 2011.
Belaruskali was a partner to Uralkali for eight years in BPC, which held 43 percent of the global potash export market. Uralkali was at one point rumoured to be interested in buying a stake in Belaruskali - which now looks unlikely.
Their joint venture started to crumble this year as rumors emerged that both were selling potash outside the partnership. The two firms previously denied those rumours.
Uralkali said it pulled out because Belaruskali had made key fertilizer ingredient deliveries outside the partnership.
The decision came as a surprise for Belaruskali, said a top manager who asked not to be identified. The company had informed Belaruskali verbally on Monday and then formally on Tuesday, according to Uralkali's CEO.
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