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It’s the worst nightmare coming true for potash and fertilizer companies Tuesday. In a shocking move, the world's largest potash maker Uralkali Group said that it is pulling out of one of the biggest potash cartels – the Belarus Potash Company (BPC) – pushing potash stocks off a cliff on fears of falling prices and leaving the industry in dire straits.  

Set up in 2005, BPC is one of the two largest cartels (the other is North America’s Canpotex) which controlled the market for potash – a key commodity in fertilizer production – over the last few years. The duopoly, which account for more than two-third of global potash trade, had usually set similar price in negotiation with India and China – two biggest buyers of potash. They influence potash pricing by controlling the production and supply.    

What Really Happened?

The Russia-based potash producer, which has around 20% share of global potash production, confirmed yesterday that it is breaking its alliance with Belaruskali in BPC, which controlled nearly half of the global potash market. Uralkali cited that its coalition with the Belarusian partner reached a “Deadlock” after the Belarusian president revoked BPC’s exclusive rights to export the country’s potash and Belaruskali violated the agreement and exported fertilizers outside the partnership.

As such, Uralkali’s Board decided to end export sales through BPC and direct all potash export through its Switzerland-based trade arm Uralkali Trading. Uralkali sees that its change of policy could lead to a fall in potash prices. A company official hinted that prices may plunge 25% to below $300 a ton from $400 a ton on increased competition.

Uralkali also landed a supply pact with a leading Chinese fertilizer importer –CNAMPGC – to supply 500,000 tons of potash through the end of 2013. It aims to boost market share and increase potash production to 13 million tons in 2014 from 10.5 million tons this year.

How Bad Stocks are Hit?

Uralkali’s statement hit potash stocks like a ton of bricks, which fell out of the bed after gaining on Monday on news that hedge fund manager Daniel Loeb’s Third Point LLC took a position in CF Industries (CF - Analyst Report).

While Uralkali’s move to exit the global cartel bludgeoned most fertilizer stocks, Potash Corp (POT - Analyst Report), Mosaic (MOS - Analyst Report) and Intrepid Potash (IPI - Snapshot Report) were the worst hit, wiping out roughly $12.5 billion of their market value combined.

The news knocked the wind out of Potash Corp. and Mosaic, who saw their share prices decimate roughly 17% and 18%, respectively, on Tuesday. Agrium’s (AGU - Analyst Report) shares sagged around 5%, Intrepid Potash crushed 29% while CF Industries, which has least potash exposure, slipped 2.5%. Monsanto (MON - Analyst Report) and Syngenta (SYT - Analyst Report) were relatively less affected stocks with shares edging down roughly 1% and 0.8%, respectively.  

Price Fear Looms     
 
Potash producers are grappling with weak potash pricing. Last week, Potash Corp. said that average realized price of potash fell around 18% to $356 a ton in the second quarter as competitive pressure pulled down contract and spot market prices. It cut its earnings forecast for the full year factoring in the price decline.    

Weak potash demand in India, a key market, and oversupply in the market is keeping potash prices under pressure. Indian government’s move to trim potash subsidy levels coupled with currency depreciation has resulted in lower demand from farmers in that country.

Uralkali’s game-changing move has triggered industry-wide fear of a price war which may push potash prices down, a bad omen for fertilizer makers. It was indeed a day that shook the fertilizer world.  

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