22 September 2011 at 8:34 GMT
Much like OPEC, the potash industry is controlled by a cartel which dictates prices, giving investors outsized returns.
Long-term fundamentals
Potash is a salt used in fertiliser and is responsible for improving water retention, crop yield, nutrient value and the disease resistance of food crops. This is important because productive crops are required given the supply of arable land per person is decreasing whilst the need for food is increasing. Add to this, the growing global population as well as the burgeoning middle class of the developing world with a hunger for more westernised diets and you have a serious need for fertiliser.
The greatest catalyst for fertiliser/potash is the price of food. As chart 1 highlights, food prices have more than doubled in the past 10 years, driving more than a four-fold increase in potash prices over the same period. As food prices increase, farmers are willing to use increasingly expensive potash to promote higher crop yields. The food scare in 2008 saw potash prices more than double within a year.
Just like OPEC but concentrated…
Potash is only produced in 12 countries, see Chart 2 with Canada being the largest producer with just less than 30 percent of total global mining production. Furthermore, the top three countries, Canada, Russia and Belarus produce approximately 64% of global potash and hold close to 90 percent of the world reserves (chart 3). The industry is mainly controlled by these three exporting countries, and the companies within these countries have banded together creating ‘marketing arms’, also known as cartels. Canpotex, the Canadian marketing organisation, sells for Potash Corp., Agrium and Mosaic which supplies 25 percent of world potash. Add to this the Belarusian Potash Group, marketing for UralKali and Belaruskali and you have two cartels supplying a whopping 60 percent (or more) of global potash production.
Both cartels have the motivation and the market power to maintain high prices. Without any formal agreement in place, this duopoly has managed to extract similar contracted prices from India and China. China and India are highly dependent on potash imports absorbing 35 percent of the world’s potash consumption (chart 4) with both feeling the wrath of the cartels, which saw the contracted prices rise substantially in 2011 and 2012. Past attempts by Chinese corporations on purchasing large potash producers have fallen through and major acquisitions of such prized assets will be greatly protected by their respective countries e.g. Sinochem’s and BHP’s interest for Potash Corp. was rejected by the Canadian Government.
Buddying up with the cartels
The best way to benefit from a cartel is to buy those companies that are in the same sector but not part of the cartel. The company benefits from the high prices that the cartel supports, but it does not need to limit its supply to support the prices. As we can see the potash industry has greatly benefited from surging demand and constrained supply (chart 5).
Keep an eye on the cartel, and watch the returns grow…
