Russia's Uralkali is doing its bit to feed the world. The biggest producer of potash has pulled out of a marketing joint venture that accounts for 43 per cent of world trade in that essential soil nutrient. That has put the future of the global potash producers' cartel in doubt. If the fertiliser price-fixing pact is really dead, billions of people will enjoy cheaper food. But there's a risk the split won't last.
BPC, a joint venture between Uralkali and Belaruskali of Belarus, is the world's largest potash exporter. It forms a duopoly with Canpotex, an alliance of North American producers. Together they control over 70 per cent of the global market. They set prices on exports to import-dependent countries like India and China. Because potash is mined and not manufactured, countries that don't have any are just price-takers.
The market's reaction to the Uralkali announcement suggests that investors are taking seriously the threat that it will forgo price discipline for the sake of market share. Canada's Potash Corp and US-based Mosaic saw their stock price fall more than 20 per cent after Uralkali said global prices might fall to $300 a tonne as early as this year, from the current $400.
The Russian company can afford to push hard. Its low production costs mean that even with potash at $250 a tonne, it would still rake in $50 a tonne of profit, according to CIBC World Markets.
Attempts to disrupt the producers' cozy arrangement have failed before - if only because they are backed by governments. The cynical interpretation of Canada's opposition to BHP Billiton's attempted takeover of Potash Corp in 2010 was that the Anglo-Australian miner planned to pull Potash out of the cartel, which would have put a rich source of tax revenue at risk.
Alas, it is still too soon to pronounce the cartel dead. BHP is expected to decide soon whether to build a huge new potash mine in Western Canada by 2017. Uralkali has left the door open to future cooperation with its Belarusian partners. Its decision to ditch BPC and trigger a price war could be part of a longer-term strategy designed to scare BHP off the Canadian project. Chinese and Indian farmers shouldn't be the only ones hoping the Russians aren't just engaging in a head fake.
