North American fertilizer stocks got an unexpected boost on Tuesday after world's largest potash maker – Uralkali – suspended operations in a Russian potash mine and evacuated workers due to increasing inflows of brine (salty water) into the site.
Uralkali said yesterday that a sinkhole with a diameter of 30-40 meters has been found to the east of the affected Solikamsk-2 mine. The mine, which is based in Russia's Perm region, has an annual capacity of 2.3 million metric tons and accounts for about a fifth of the company’s total capacity.
Uralkali is closely monitoring the volumes of brine inflow and has informed the relevant state authorities about the incident. However, it did not state when the mine will be put back into operation. A similar incident forced the company to shut a mine at Berezniki back in 2006.
The news came when Uralkali is negotiating supply deals with China for 2015 as prices for potash continue to recover from a roughly 23% fall that took place in late 2013, a Bloomberg report said on Tuesday.
The Solikamsk-2 mine suspension triggered an immediate speculation that the incident could affect Uralkali’s production capacity, thereby benefiting rival potash producers. Uralkali, which has a production capacity of 13 million tons, produced 10 million tons of potash last year.
The news sent rival North American fertilizer stocks spiraling upwards roughly a week ahead of the Thanksgiving Day with Potash Corp. (POT) racking up the biggest gain. Potash Corp.’s shares rallied as much as 6% on Nov 18 while both Agrium (AGU) and Mosaic (MOS) gained around 4% in the trading session on that day. Intrepid Potash (IPI) shares went up 5.5% while Israel Chemicals Ltd. (ICL) gained around 2.6%. Many of these stocks extended their gains yesterday while a few received analyst rating upgrades.
On the other hand, Uralkali shares got hammered following the news on fears of a potential mine shutdown. The stock tumbled around 9% on Moscow stock exchange on Tuesday, the most in around 15 months. The stock continued to be battered by the incident, skidding roughly 21% yesterday.
Potash stocks fell off a cliff in Jul 2013 after Uralkali pulled out of one of the biggest potash cartels – the Belarus Potash Company (BPC) – creating fears of falling prices and leaving the industry in dire straits.
Set up in 2005, BPC is one of the two largest cartels (the other is North America’s Canpotex) which controlled the market for potash – a key commodity in fertilizer production – over the last few years. The duopoly, which account for more than two-third of global potash trade, had usually set similar price in negotiation with India and China – two biggest buyers of potash. They 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. The Russia-based potash producer cited that its coalition with the Belarusian partner reached a “Deadlock” after the Belarusian president revoked BPC’s exclusive rights to export the country’s potash and Belaruskali violated the agreement and exported fertilizers outside the partnership.
As such, Uralkali’s Board decided to end export sales through BPC and direct all potash export through its Switzerland-based trade arm Uralkali Trading. Uralkali noted that its change of policy could lead to a fall in potash prices on increased competition. It also landed a supply pact with a leading Chinese fertilizer importer – CNAMPGC – and announced its goal to boost potash production volume.
Ownership at Uralkali underwent a shakeup following the cartel dissolution. Russian tycoon Mikhail Prokhorov acquired a 21.75% stake in Uralkali from billionaire Suleiman Kerimov. Moreover, Russian fertilizer company Uralchem purchased around 20% of Uralkali.
While potash prices have recovered this year after taking a nosedive in 2013, producers of the nutrient are still faced with weak market fundamentals. Weak potash demand in India (a key market) due tightened potash subsidy levels and currency depreciation coupled with oversupply in the market have so far kept potash prices under pressure.
However, the Uralkali ‘Sinkhole’ incident could possibly create a supply scenario that could benefit North American potash producers, especially Potash Corp. which is currently in the mood for further expansion. The mine suspension could tighten potash supply globally, perk up prices and create a more favorable operating environment for western producers.
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