Will OAO Uralkali Remain the King of Potash?

Michael Teague  |

Since the beginning of August, OAO Uralkali, the world’s largest producer of the potassium-based fertilizer known as potash, has been a consistent news item in global commodities markets as well as an object lesson in the relationship between business and politics on Russia’s Western borders.

Indeed, the saga that has played out over the unraveling of a long-standing production deal between the Russian giant and its state-owned partners in neighboring Belarus has had serious repercussions on the global fertilizer market. The sudden and drastic 25 percent reduction in the spot price of the commodity that is now expected by the end of 2013 could be a disaster for the Belarusian economy that is so heavily dependent on the commodity for revenue, and has furthermore left almost no potash stock untouched.

As is so often the case when vital resources become the subject of dispute between nations, there is also a substantial geopolitical dimension to the whole affair. The departure of Uralkali from the Belarusian Potash Co. (BPC) consortium has bottomed out into yet another situation in which Russia finds itself having to discipline one of its former Soviet-era satellites, at a time when the country’s political capital is being fully diverted to other pressing issues, not least of which being the conflict in Syria.

Unfortunate perhaps, but also fitting, as there is a great deal at stake. The global potash market is worth about $20 billion dollars, of which some 20 percent is firmly within Uralkali’s grasp.

The company traces its roots back to the immediate wake of the Russian revolution that established the U.S.S.R. In 1926, the State Planning Committee approved the development of the Soviet potash industry, to be centered around the town of Solikamsk, northeast of Moscow. By 1930, mining complexes were established in both that city and nearby Brezniki, which remain the company’s production epicenter, though it has licenses to explore other reserves around the country.

Seeing the pressing need for resource independence, the fledgling Soviet government continued development at both sites apace until the Second World War, when projects were partially or entirely put on hold until the ultimate defeat of the Axis powers.

From that point, development and production picked up where they left off, and in 1964, the Soviet National Economy Council established the Uralkali industrial association in Berezniki, integrating the mining complexes in Solikamsk and Berezniki. The collapse of the U.S.S.R., that began in the late ‘70s and early ‘80s slowed activity at Uralkali somewhat, but the company rung in the new millennium in 2001 with the construction of the Baltic Bulk Terminal (BBT) in St. Petersburg, a fertilizer transshipment facility with a storage capacity of over 6 million tons.

Starting in 2007, the company began trading shares on the London Stock Exchange under the ticker URKA.

Uralkali is a business whose strategy relies on the high degree of vertical integration it has established throughout its long history. On the production side, the company explores for, mines, and produces potash, and is involved in logistics through storage and transportation (its boasts a fleet of some 8,000 specialized rail cars in addition to the BBT storage facility), and handles the retail side as well, through Uralkali Trading SA.

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But Uralkali’s dominance of the global fertilizer market has for some time now been exercised through its partnership with the Belarusian Potash Company. Together, the two kept a short leash on production that saw the price-per-ton of the commodity hit $900 only three years ago, compared to the $400 price it was fetching prior to the recent debacle.

Indeed, it was an unashamed “price-over-volume” strategy whose only parallel in the industry is the Canadian-American consortium known as Canpotex that groups together major producers Agrium Inc. (AGU) , The Mosaic Company (MOS) , and the Potash Corporation of Saskatchewan (POT) . Until recently, BCP and Canpotex accounted for some 70 percent of global exports.

The origin of the dispute that led to the breakup of BCP is unclear. Perhaps a result of the most recent revival of cold-war rhetoric subsequent to the recent clash between Russia and the US over the Syrian civil war, one can often glean the impression that the fault lies squarely with Russia. The Belarusian government under its current president Alexander Lukashenko (in office since 1994), however, is often referred as the most authoritarian on the European continent, even when judged by the precedent of its larger and more powerful neighbor.

In late August the KGB, the Belarusian KGB, that is, arrested Uralkali CEO Vladislav Baumgartner for nepotism and corruption after the latter was invited to Belarus to settle the dispute over the BPC production agreement. He has languished in a Soviet-era prison in the capital city Minsk ever since, though there is some indication that he will soon be released. It should be kept in mind that Belarus depends on the export of potash, along with higher prices of the commodity (i.e.-price over volume), for nearly 10 percent of its total export revenue.

And the origins of the dispute remain unclear. While the Belarusian government had accused Uralkali of selling fertilizer outside of the terms of the agreement, the Wall Street Journal points out that the Belarusian components of the BPC had been doing much the same themselves. Furthermore, the article notes that only two years ago, Russia for all intents and purposes saved the faltering Belarusian economy with a $3 billion, 10-year loan, in exchange for which the government in Minsk was expected to privatize some of its state-run industries, including the BPC producer Belaruskali. None of the agreed-upon privatization has taken place, however.

While the reality is likely far more complex, the potash market has been thrown into a tailspin as a result. Along with the decline in prices, most potash companies, including most members of the Canpotex consortium like Mosaic and Potash Corp. of Saskatchewan, have seen shares off between 10 and 20 percent.

Uralkali itself has watched shares drop from a July 19 price of over $33 per share on the LSE, down to $22 on 31 July, before recuperating slightly to $28. But the company seems to be as little concerned about this as it as observers are confused about its backing out of the highly lucrative BCP agreement. In the meantime, Uralkali is looking to China and other destinations in East Asia for the type of demand that can make of for high prices, in other words the strategy has reversed to volume-over-sales.

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