BREAKINGVIEWS-Potash Corp's German foray reflects cartel woes

Fri Jun 26, 2015 8:07am EDT
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By George Hay

LONDON, June 26 (Reuters Breakingviews) - Potash Corp is making a move to protect its home turf. The Canadian group that controls a fifth of the global market in potash, used in fertilisers, swooped on June 25 for German rival K+S . The chief driver looks to be the ongoing travails of a global cartel that is as rickety as the one in potash's sexier fellow commodity, oil.

Through a joint marketing agency called Canpotex, Potash Corp and its partners control just over a third of global potash supply. But maintaining prices has become tougher since Russian group Uralkali quit the Belarusian Potash Company, which controlled another quarter of supply, in 2013. Throw in a Chinese slowdown and the disruptive presence of commodities giant BHP Billiton , which is working on a major supply source in Canada, and potash prices have fallen from above $400 a tonne a few years back to nearer $300 now.

Buying K+S would help the Canadians hold the line on prices. The German group's 7 million tonnes of annual production will soon be augmented by a further 2 million tonnes from a new legacy project in Potash Corp's own Canadian backyard. The combination would control 27 percent of the global potash market, and give Potash Corp further geographical diversity and access to niche fertilisers where prices are holding up better.

The Canadians face two hurdles. The first is antitrust concerns, though these would ease if a minority stake in Israel's ICL, which has European activity, was sold. The second is Potash Corp might have to pay more.

Although the mooted offer of 41 euros a share represents a 40 percent premium over K+S's share price just before news of the approach emerged, it's only 25 percent more than the March market price. It's below the 58 euros attained in 2011. Fair value could be more like 46 euros, stripping out debt and assuming annual potash capacity is worth $1,000 per tonne, Bankhaus Lampe analysts reckon. If Potash Corp shuttered K+S's German operations and ran its own lower-cost Canadian mines harder, there could also be tangible synergy benefits.

Potash Corp may have one other motivation. The Canadian government had to step in to thwart a $39 billion bid from BHP in 2010. If BHP comes sniffing again, its Canadian quarry would be a bigger stretch.   Continued...