After getting a sudden lift last week, North American fertilizer stocks got beaten up yesterday on reports that the world's largest potash maker – Uralkali – would commence repair work at the affected Solikamsk-2 mine in Russia's Perm region and potentially launch partial production at the mine.
Uralkali, last week, suspended operations at the mine and evacuated workers due to increasing inflows of brine (salty water) into the site. The company said that a sinkhole with a diameter of 30-40 meters has been detected to the east of the Solikamsk-2 mine.
The mine suspension news sent North American potash stocks spiraling upwards last week on speculation that the incident could affect Uralkali’s production capacity and create a tight supply scenario that could benefit rival potash producers. On the other hand, Uralkali shares got punished following the news on fears of a potential mine shutdown.
According to media reports, Uralkali CEO Dmitry Osipov told reporters that the company is in discussion for a possible restart of operations at half of the Solikamsk-2 mine. Uralkali, however, said yesterday that the reports were essentially related to maintenance works and it is not in discussion with regional authorities for restarting full or partial production at the mine. The company added that one of the important tasks currently is the “possibility of backfilling the worked out areas of the mine with halite waste.”
Potash Corp. (POT), which racked up the biggest gain last week, tumbled 6% yesterday. Mosaic’s (MOS) shares slipped 3.7% while Agrium (AGU) lost 2.7% on that day. Moreover, shares of Intrepid Potash (IPI) and Israel Chemicals Ltd. (ICL) sagged around 2.4% and 4.2%, respectively.
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 Uralkali to shutter a mine at Berezniki back in 2006.
Potash stocks fell out of the bed in Jul 2013 after Uralkali pulled out 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 a production capacity of 13 million tons and around 20% share of global potash production, broke its alliance with Belaruskali in BPC after its coalition with the Belarusian partner reached a deadlock. Its board decided to end export sales through BPC and direct all potash export through its Switzerland-based trade arm Uralkali Trading. Uralkali also warned that its change of policy could lead to a fall in potash prices on increased competition.
Uralkali’s move to exit the global cartel hit potash stocks like a ton of bricks 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 bounced back 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 to tightened potash subsidy levels and currency depreciation coupled with oversupply of the nutrient in the market have so far kept potash prices under pressure.
While Potash Corp., Agrium, Intrepid Potash and Israel Chemicals hold a Zacks Rank #3 (Hold), Mosaic is a Zacks Rank #5 (Strong Sell) stock.
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