Potash Corp./Saskatchewan (USA) (POT) Gets Pulverized But It’s Not as Bad as It Looks

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Although the Potash Corp./Saskatchewan (USA) (NYSE:POT) industry was pulverized yesterday after the world’s biggest producer said it would no longer abide by limits on its output, it was an outcome that was bound to happen sooner or later and is one that will ultimately benefit the industry.

Potash Corp./Saskatchewan (USA) (NYSE:POT)

The decision by Russia’s Uralkali to end its distribution agreement with Belarus, which controls roughly 43% of global exports, means the price of potash that had been artificially propped up for years — and reached as high as $900 a ton before the global economic meltdown in 2008 — will now trade at more reasonable levels, perhaps as low as $300 a ton by the end of the year, according to Uralkali.

While the immediate effect was to crush the stock prices of producers like Potash Corp./Saskatchewan (USA) (NYSE:POT) and Mosaic Co (NYSE:MOS), which tumbled 16% and 17%, respectively, it means there will be an industry shakeout that will have only the best companies producing enough to meet demand.

It also means that potash miners like Vale SA (ADR) (NYSE:VALE) were seemingly prescient in walking away from new projects while BHP Billiton was fortunate its expansion plans were delayed. Or maybe they just saw the writing on the wall.

Last September, Uralkali settled a U.S. antitrust claim for around $13 million that charged the producer and a cartel that included Potash Corp./Saskatchewan (USA) (NYSE:POT), Mosaic Co (NYSE:MOS), and Agrium Inc. (USA) (NYSE:AGU) of conspiring to raise prices since 2003. All told, the group controlled about 70% of the world’s potash.

The expected collapse in pricing as a result of Uralkali’s move means competitors will likely stay away from the business now as margins get sliced. Uralkali looks to be making a push for market share at a time when its rivals are constrained and because it enjoys some of the fattest margins in the industry, it can withstand the compression that will pressure others. It also has the benefit of being the lowest-cost producer and of being readily able to supply China by train.

It’s one of the reasons Intrepid Potash, Inc. (NYSE:IPI) was hit so hard, falling 29% on the news, as it’s considered to be one of the higher-cost producers. Uralkali says the average cost of producing Potash Corp./Saskatchewan (USA) (NYSE:POT) runs around $200 per ton so the lower pricing environment will make for a trying time for marginal producers. Moreover, because Intrepid Potash, Inc. (NYSE:IPI) is also not affiliated with any marketing group — Potash Corp./Saskatchewan (USA) (NYSE:POT), Mosaic Co (NYSE:MOS), and Agrium Inc. (USA) (NYSE:AGU) control Canpotex — it doesn’t have the same negotiating heft as do its rivals to set prices.

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