August 28, 2013 / 2:00 PM / in 4 years

Russia potash row seen causing market tumult before price drop

BEIJING/MUMBAI, Aug 28 (Reuters) - The global potash market faces short-term turbulence due to a dispute between major exporters Russia and Belarus before a definitive collapse of the sector’s once-mighty cartel brings prices for the fertiliser ingredient down sharply.

Belarus this week detained the chief executive of Russia’s Uralkali, the world’s top potash producer, accusing him of inflicting severe economic damage.

Moscow demanded the release of the CEO, Vladislav Baumgertner. Uralkali controls 20 percent of the world market and is partially owned by Suleiman Kerimov, a billionaire with close ties to Russian President Vladimir Putin’s administration.

“We are very concerned as to how things will develop next. Chinese firms must have suspended signing any deals before the situation becomes clear,” said a Chinese industry source familiar with the strategies of potash buyers.

The detention is an escalation of a business dispute between the two countries over the future of potash sales. Some key importers are now thinking about suspending talks on purchasing until the matter is clarified.

Belarus also put four managers from Uralkali on Interpol’s wanted list, including sales head Oleg Petrov. It remains unclear whether he can travel to China or India, two of the world’s biggest users of the crop nutrient, for talks.

CUTTHROAT COMPETITION

The market for potash has long been dominated by a handful of players led by the Belarusian Potash Co (BPC), a marketing venture between Uralkali and Belarus’ state-owned Belaruskali.

Together with Canpotex - which groups North American firms Potash Corp, Agrium and Mosaic - BPC controlled 70 percent of sales, keeping prices high for farmers.

Angered by a law passed in Belarus last year allowing Belaruskali to sell product outside the marketing venture, Uralkali quit the cartel on July 30, saying it would seek to maximise its own volumes and warning prices could fall as much as 25 percent this year.

The development would be a major hit to Belarus, which generates over a tenth of its budget revenues from potash exports. A threat by Belarus to hold Baumgertner for at least two months suggests there is little hope of reconciliation.

“The way developments are happening, it is adding to bitterness. I don’t think Uralkali and Belaruskali can come together again. It is (certain) there would be cutthroat competition among suppliers, which is good for buyers,” said a senior official with a leading Indian potash importer.

China imports about half of the 10-11 million tonnes of potash it uses each year. Potash use in India, which relies on imports, has almost halved to 3.5 million due to rising prices.

“While the Russian-Belarusian statements and recent actions have created uncertainty in the potash market it is business as usual, although I think it’s fair to say buyers are only buying what they need,” said Richard Downey, spokesman for Canadian potash producer Agrium.

An industry source said he believed fiercer competition in the potash market would draw in Canpotex.

“Potash prices will come off over the next six to 18 months,” he said.

Adding to the turbulence, Belaruskali was left with no global trading structure after the breakup of BPC, meaning Belarus will be forced to fight for new contracts.

Boris Krasnojenov from Renaissance Capital said he saw little chance for Uralkali and Belaruskali to work together again: “Given a surplus of potash in the market, a price war will likely continue and potash prices will move further down”.

Analysts from Citi said they expected the escalation in tensions between Russia and Belarus further to damage investor appetite for potash stocks.

“Given the uncertain demand outlook from India and likely continuation of weak prices, we don’t see any recovery in the second half,” Citi said.

“Amid major new brownfield capacity coming online in the next two-three years in Canada and Russia, and long-term demand growth of only 2-3 percent the market appears long for the medium term.”

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