 "<b>Pavan Srinath:</b> Potash - From Russia with love")
Potash refers to a set of fertilisers that have soluble potassium in them - essential for plant nutrition and productivity. Potash is consumed heavily by India, China and all large agricultural producers. Mostly mined, it has a global market estimated to be worth $23 billion in 2012. Soon after the cartel broke down, potash prices fell from about $400 a tonne to about $300 and are expected to go even lower in 2014. Buyers and distributors from China, India and Brazil have since asked for discounts on ongoing and future contracts.
The events that led to the break-up of the East European cartel also serve as a useful study in the dynamics of international trade cartels. Two big cartels control the global potash trade: the first being BPC, a joint venture formed by the Russian company Uralkali and Belarusian Belaruskali. The second is Canpotex: an association of three Canadian mining companies. Together they controlled about two-thirds of the supply and ensured reasonably high prices in the global market. This is now under threat after BPC broke apart. Any rapprochement between Uralkali and Belaruskali was ruled out in late August when Belarus detained Uralkali's chief executive officer and charged him with abuse of office. This has since escalated into a diplomatic row and a trade war with Russia, with the latter causing disruptions in oil and milk supplies to Belarus.
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On the other side of the world, the Canadian cartel Canpotex is in trouble from another source. BHP Billiton, the world's largest mining company, is looking to enter potash mining in a big way through the acquisition of a $2.6-billion undeveloped mine in Canada called the Jansen mine. BHP Billiton wants to distribute the potash independent of the Canadian cartel and thus poses a direct threat to its continued existence.
If the Eurasian cartel had remained stable, potash prices would have stayed up and all suppliers would have benefited. Cartels ensure that by fixing prices, by coming to an agreement over market shares and the total industrial output. With collusion trumping competition, cartels are considered illegal within most domestic economies but national or international cartels are quite commonplace globally. The most prominent of these is the Organisation of Petroleum Exporting Countries (OPEC), which has successfully controlled the global oil market for over 40 years.
So why did the Russian-Belarusian potash cartel break down, in spite of good reasons to stay together? At least four factors are evident. First, the demand for potash is quite elastic. Potash consumption in India, for example, fell from about 6 to 3.5 million tonne over the last few years due to rising prices. The need for potash in most emerging markets means that demand can balloon significantly at lower prices. Thus, producers who choose to sacrifice high prices for high volumes can indeed do well. Russia's Uralkali is well-positioned to do exactly that.
Second, Uralkali's mines have among the lowest costs of production in the world, thereby allowing them to better absorb the impact of lower prices. This gives them a competitive advantage in choosing volume over price since other mines will fail in remaining profitable before them. The shift of strategy from "price-over-volume" to "volume-over-price" was also a stated objective during the split. The Jansen mine in Canada is also expected to have low production costs, which is why BHP Billiton is keen on continuing with the project despite falling prices.
Third, the trust between Belaruskali and Uralkali was weak even at the best of times. A recent Bloomberg article covers this well, pointing to one trigger of discord that took place in 2011. While Belaruskali was earlier the larger partner in terms of supply, this changed after the Uralkali took over a Russian rival company, Silvinit. Afterwards both partners had to reduce production capacity significantly due to falling prices. Belarus has high public debt and with potash forming about 8 per cent of its exports, the state-owned potash company had strong incentives to subvert its agreement with Russia to sell only through the joint venture. Belarus had made independent overtures to Brazil, India and China to sell potash. Russia, in turn, also sold potash outside the agreement to China by rail, and these defaults were well known to both parties. The lack of trust ensured that cracks could not be painted over and allowed small disagreements to snowball into larger battles, as is evident in the last month's news.
Fourth, the angst-ridden economic relationship between Russia and Belarus were worsened by a clash of personalities between the premiers Vladimir Putin and Alexander Lukashenko. The two literally traded remarks about who caught bigger fish as recently as last month.
Apart from these, a possible fifth reason is that some of the emerging economies took steps to undermine the stability of the cartel, although there isn't any evidence of that as of now. One report in The Hindu notes that Russian media blame India and China for breaking up the cartel, but there is little so far to substantiate that claim.
Potash is but one commodity on the international market where supply has been cartelised. India is on the wrong side of international cartels most of the time, and it is in our strong economic interest to champion the cause of free global trade. In the meantime, we can do our best to reap the dividends of lower potash prices. To ensure India's economic growth in the long run, the nation will have to do its best to destabilise global cartels, or at least secure favourable terms. The author is policy research manager at the Takshashila Institution, an independent public policy think tank.