North American potash stocks have been in the spotlight of late, thanks to the mine ‘Sinkhole’ predicament of the world's largest potash maker – Uralkali.
Shares of potash companies notched up unexpected gains last month after Uralkali suspended operations at the Solikamsk-2 mine in Russia's Perm region and evacuated workers due to increasing inflows of brine (salty water) into the site. A sinkhole with a diameter of 30-40 meters was detected to the east of the Solikamsk-2 mine on Nov 18.
However, North American potash stocks got beaten up roughly a week after that ephemeral rally on media reports that Uralkali would start repair work at the mine and potentially launch partial production at the site. Uralkali, however, clarified that those reports were related to maintenance works and the company was not in discussion with regional authorities for restarting full or partial production at the mine.
Uralkali came up with an update on the situation of the affected mine yesterday and stated that the size of the sinkhole has widened to 50-80 meters (elevating the risk of complete mine flooding) and the brine inflow into the mine has varied between Nov 18 and Dec 10. The company continues to monitor the situation and is taking up a number of measures to mitigate consequences of the accident (including water inflow checks and construction of a brine diversion channel) and save the mine.
The news triggered a lift in most of North American potash stocks yesterday on renewed speculation that a potential shutdown of the Solikamsk-2 mine would affect Uralkali’s production capacity, thereby benefiting rival potash producers.
Shares of Potash Corp. (POT) and Mosaic (MOS) rose 1.5% and 1.2%, respectively, yesterday. Intrepid Potash (IPI) climbed around 4% while Israel Chemicals Ltd. (ICL) raked in a 1.6% gain. Agrium's (AGU) shares ticked up 0.6% in the trading session but pulled back to close the day 1.6% lower.
Uralkali, which has an annual production capacity of 13 million tons, faces an alarming threat of losing its position as the largest producer of potash to rival Potash Corp. The Solikamsk-2 mine has an annual capacity of 2.3 million metric tons and accounts for about a fifth of Uralkali’s total production capacity. A similar incident forced the company to shutter a mine at Berezniki back in 2006.
Potash stocks took a pounding in Jul 2013 after Uralkali exited of one of the biggest potash cartels – the Belarus Potash Company (BPC) – creating fears of falling prices. BPC is one of the two largest cartels (the other is North America’s Canpotex) which controlled the market for potash over the last few years. The duopoly, which account for more than two-third of global potash trade, influence potash pricing by controlling the production and supply.
Uralkali, which has around 20% share of global potash production, broke its alliance with Belaruskali in BPC and decided to direct all potash export through its Switzerland-based trade arm – Uralkali Trading. The company also warned that its change of policy could lead to a fall in potash prices on higher competition.
The cartel dissolution wreaked havoc on potash stocks with Potash Corp., Mosaic and Intrepid Potash were the worst affected, wiping out roughly $12.5 billion of their market value combined.
While potash prices have recovered this year after taking a tumble in 2013, producers of the nutrient are still faced with weak market fundamentals. Weak potash demand in India (a key market) due to depressed potash subsidy levels and currency depreciation coupled with oversupply of the nutrient in the market have so far kept potash prices under pressure.
But the Uralkali mine incident may create a supply scenario that could benefit western potash producers, especially Potash Corp. which is currently in expansion mood. A possible mine shutdown could constrict global potash supply, push up prices and create a more favorable operating environment for these producers.
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