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Russia walks out of ‘Potash OPEC’
August 2, 2013, 8:43 am

[Getty Images]

Uralkali is one of the world’s largest potash producers [Getty Images]

Russian potash fertiliser company Uralkali has ended its joint venture with Belaruskali after the Russian firm said its partner had “violated” the major principle of the cartel.

The Belarusian Potash Company (BPC) was the world’s largest potash producer and controlled about 40 per cent of global potash exports.

Uralkali company shares plunged around 25 per cent after the announcement was made and the price of potash also fell.

The decision means Uralkali will now switch to its in-house trading unit Uralkali Trading based in Switzerland.

Belarus President Alexander Lukashenko revoked BPC’s exclusive rights to export potash supplies late last year.

Russian media speculated that President Lukashenko signed the decree under the influence of India and China that planned to bring the price of potash down., a leading online newspaper in Russia says Lukashenko was persuaded that Belarus could make more profit if it was acting alone.

Uralkali’s Chief Executive Officer Vladislav Baumgertner said relations between the two companies had reached a deadlock.

He also stressed that Belaruskali violated the major principle of the cartel that stated that the export sales of the two companies could only go through BPC – trader for both Uralkali and Belaruskali.

“Uralkali has always insisted that exports of both producers should go through Belarusian Potash Company. This is a fundamental principle of our cooperation and has been violated by the Belarusian president’s decree,” Baumgertner said.

Potash exports account for almost 10 per cent of Belarus’ budget.

“Uralkali has used a price-over-volume strategy; however, the potash market remains oversupplied. Even Uralkali’s substantial winter-season production cuts, which pushed the utilisation rate to 50 per cent, did not help stabilise the market; 1H13 production volume for the company dropped 6 per cent HoH,” says a report prepared by Renaissance Capital and provided to The BRICS Post.

“The devaluation of India’s rupee, growing domestic potash output in China, and the lack of production discipline across major potash producers have increased pressure on potash prices. The lack of buying interest from China and India has created a situation in which Uralkali may not meet its FY13E production guidance of 9.5-9.7 mnt,” Renaissance Capital’s report says.

Uralkali has now changed its strategy towards introducing a new volume-over-price strategy.

“Factoring in Uralkali’s relatively high fixed costs, the company obviously benefits from maximising production volume. It plans to ramp up production to 10.5 mnt in FY13E and reach a 100 per cent utilisation rate (13 mnt) in FY14E. As the most-efficient producer on a global cost curve, Uralkali plans to gain market share from its peers”.

Uralkali Trading reached an agreement with CNAMPGC, a major Chinese fertiliser importer, for the delivery of an optional quantity of potash within the framework of a 2013 contract.

“We are sure that this agreement will contribute to potash fertiliser consumption by Chinese agricultural producers. In China we can see that potash is significantly under-applied compared to the volumes recommended by scientists. We believe that this agreement will provide certainty for the global potash market and the basis for overall growth of sales volumes in H2 2013,” siad Oleg Petrov, Uralkali Director for Sales and Marketing.

Uralkali’s exit from the joint venture and decision to freeze its buy-back programme may increase pressure on the company’s stock and damage cash flow.

“However, we support management’s decision to change strategies and terminate its buy-back programme, as we believe it may help to crystallise the company’s value and bring back investors with a long-term investment horizon,” says Renaissance Capital’s report.

Uralkali is one of the world’s largest potash producers accounting for 20 per cent of the world’s potash production.

By Daria Chernyshova in Moscow, Russia for The BRICS POST

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