Do potash prices stand to benefit from the strengthening of the Canpotex consortium?
The news last week that the Canadian potash giant PotashCorp had made a takeover offer for German miner K+S raised the prospect that the potash industry was poised for a period of consolidation, after two years of fragmentation.
However Credit Suisse has cast doubt on the idea that such a consolidation would drive potash prices upward, at the same time as industry sources move to allay fears of supply restrictions in Germany.
The global potash market was thrown into disarray in 2013 with the collapse of the BCP cartel.
BCP constituted Belarusian stateowned producer Beleruskali and Russian miner Uralkali.
BCP and Canopotex, a consortium of North American miners of which Canpotex is the largest, maintained a duopoly on potash for decades, setting prices through negotiations with buying consortiums in China and India.
The collapse of BCP cartel sent potash prices downward, as Belaruskali moved aggressively to conquer new markets.
At the same time, a number of greenfield sites are in development by smaller players, whose potash production fall outside the traditional cartel system, and nonCanpotex mining giant BHP continues to expand its interest in the potash market, after having takeover offers rebuffed by PotashCorp in 2010.
Analysts are looking to the possibility of Uralkali delisting from exchanges in Moscow and London, and the potential for the group to be taken over by Russian chemical company EuroChem.
EuroChem is developing greenfield potash sites in Russia, projected to come on line in 2017.
EuroChem ownership of Uralkali would further consolidate the Russian potash industry, helping supply discipline. In 2011 Uralkali took over major rival Silvinit.
The prospect of K+S's capacity coming under the control of Canpotex, at the same time as Russian potash producers combine forces, would leave the industry more consolidated than it has been since the BCP collapse.
Last week broker Raymond James gave voice to the assumption that PotashCorp was interested in "securing 'uncontrolled' greenfield supply on the horizon," in particular K+S's new Legacy project in Saskatchewan.
However, Credit Suisse has pointed that the prospect of new capacity being absorbed into Canpotex may not lead to a squeeze on supply.
Credit Suisse, which estimates that PotashCorp and K+S combined would control 2025% of the world's potash supply in 2020, said that the group could focus on "price of volume" by restricting supply, but that would prove only a "bandaid" for the global potash market.
The bank pointed out the possibility for an enlarged PotashCorp to instead shift its focus to "volume over price" by upping output.
"We argue that the latter option would significantly reduce per unit costs as well as optimize netbacks by mine," Credit Suisse has said.
Credit Suisse also notes if the current offer is rebuffed, there could be an incentive for PotashCorp to up supply of the nutrient.
The bank argues that thanks to its ample share of global supply, PotashCorp could "easily" push down global potash prices "undoubtedly leading to a reduction in K+S' share price," allowing PotashCorp to complete the deal at a lower price.
"We would argue that by keeping prices flat or even voluntarily pressuring prices further, other options may present themselves other than just K+S at a lower price, possibly even buying the portion of BHP's Jansen project [...], while leaving other projects to the wayside," said Credit Suisse.
And if the deal is accepted, the strengthening of the Canpotex consortium would not necessarily lead to a rise in potash prices.
The takeover offer has raised the possibility that PotashCorp will move to close K+S German mines, which have a high extraction cost, in order to restrict global supply.
On Monday unnamed sources were reported to have told journalists that PotashCorp would not be closing facilities.
If the PotashCorp offer is to succeed, it may be necessary to reassure interested parties that there will be no closure of potash facilities.
PotashCorp attempted a takeover of K+S in 1997, but was rebuffed by the German government.
Credit Suisse points out that the proximity of K+S mines to European demand meant lower freight costs, making their output more competitive than it at first appeared.