Following OAO Uralkali's decision to break up a 'marketing venture' that controlled around 43% of global potash exports, the world's largest producer is breaking the cartel that many US fertilizer companies have enjoyed. This move signals prices will weaken as the Russian company tries to grab market share shifting sales to its own unit. As Goldman notes, such behavior by Belaruskali in a structurally oversupplied potash industry should push for stricter competition for end customers and result in a significant swift decline in pricing to a level of marginal cost production. This slashing of margins has crushed the fertilizer stocks with POT, MOS, and AGU all down significantly in the pre-market."Uralkali’s announcement completely turns the global potash market upside down," noted one analyst. "If previously global potash producers were acting like an oligopoly, working with the rule that benefited higher potash prices over shipped volumes, now the market will be fully competitive." Shock, horror!
POT -23% pre-market
[8]
Via Goldman Sachs,
Following the July 29 meeting of the Board of Directors, Uralkali has decided to stop its export sales through Belarusian Potash Company (BPC) and direct all export volumes through Uralkali Trading owing to breach of discipline by Belaruskali, which has made a number of deliveries outside BPC. Uralkali is moving from a ‘price over volumes’ strategy to a ‘volumes over price strategy’ and targets 10.5MMT in 2013 and 13MMT in 2014.
Industry implications.
Such behavior by Belaruskali in a structurally oversupplied potash industry should push for stricter competition for end customers and result in a significant swift decline in pricing to a level of marginal cost production, which according to our ECS team stands at $300/t (vs. our GS ECS team’s price forecasts $445/$486/$520 for 2H13/2013/2014).
Note that URKA is the lowest cost producer globally (cash cost of $171/ton on a delivered basis vs. its nearest peer at US$205/t and industry average cash cost of c.US$240/t). We note however that potentially lower prices might induce higher demand. GS ECS currently estimates 2013/14 potash demand at 53.4/55.1mn tons and a price decline could potentially lead to c.10% uplift in volumes. For the global potash industry, weakening pricing signifies intensifying competition, consolidation and M&A activity.
URKA-specific implications. We believe URKA’s free cash flow will be pressured as our sensitivity analysis (Exhibit 1) shows downside risks to EBITDA with mostly stable capex ($500-600 mn). We further note that the company has accumulated debt and in an increasingly competitive market environment, it may require restructuring. Current covenant levels are 3x ND/EBITDA and short-term debt amounts to $1.8 bn.
Implications
Our URKA estimates are under review. This news also has negative read across for Israel Chemicals.
Following today’s announcement that Uralkali has decided to stop its export sales through BPC, Belarusian Potash Company and direct all export volumes through Uralkali Trading owing to a breach of discipline by Belaruskali, we are putting our estimates, price targets, and ratings for Potash Corp. (POT), Mosaic (MOS), Intrepid Potash (IPI) and Agrium (AGU) under review.