Cartels, conflict and potash

July 25, 2022

Pauls Miklasevics

Chief Asset Management Officer at BluOr Bank

The use of the term 'cartel' is usually associated with Columbian or Mexican drug lords, but 15 years ago, the two richest cartels on earth had nothing to do with narcotics.

They produced something far more important: potash.

One cartel was based in North America. It was – and is still – called Canpotex. In 2007, it marketed potash on a global basis on behalf of the Canadian companies Potash Corp of Saskatchewan, Agrium, and Mosaic Corp., which is headquartered in the US but produces potash from its mines in Canada's Province of Saskatchewan.

Saskatchewan has been referred to as the “Saudi Arabia of potash,” but this is not an appropriate comparison.

Saudi Arabia only has around 16% of the world's known oil reserves, but Saskatchewan has 30% of the world's known potash reserves.

Saudi Arabia produces 12% of the world's oil, while Saskatchewan produces 32% of the world's potash.

This puts it in a more dominant position relative to the rest of the world supply that most any major commodity on earth.

In 2018, Potash Corp and Agrium would merge to form a company that is now known as Nutrien.

Nutrien is the world's largest potash producer and is expected to produce around 15 million tons of potash this year (global production in 2020 was just over 69 million tons).

The second cartel was called the Belarusian Potash Company (BPC) – a partnership between Belarusian producer Belaruskali and Russian producer Uralkali.

This cartel no longer exists, as the partnership was dissolved by Uralkali in 2013. Uralkali alleged that Belaruskali was exceeding their sales quotas, which Belaruskali denied.

What is more likely is that Uralkali simply wanted to generate more revenue and was positioned to withstand a global pricing war as a low-cost producer. Whatever the reason, the dissolution of the BPC broke the potash duopoly and resulted in more pricing competition, which lowered global potash prices and disincentivized new competition.

Despite the dissolution of the BPC, Belarus and Russia remained significant producers of potash.

In 2020, Russia produced just under 14 million tons of potash or 20% of global supply. Belarus produced just over 12 million tons, or around 18% of global supply.

As such, the combined potash production of Russia and Belarus in 2020 was 38% of global supply, exceeding Canada's 32% of global production. Russia and Belarus are low-cost producers who have recently been content to ship larger volumes at lower prices. In fact, “SIA Uralkali trading” a subsidiary of Uralkali based in Latvia had the largest turnover of any company in Latvia in 2020: 1.81 billion euros, but reported a loss of 90.48 million euros.

In the context of overall economic impact potash exports are particularly important to Belarus and constitute around 9% of their annual exports.

This is why we anticipated that potash exports would be the target of western sanctions after the political repressions following the August 2020 Belarusian presidential elections and hijacking of Ryanair flight 4978 of last summer. We also knew that sanctioning 18% of the global production of any commodity will resultingly have a massive impact on price.

At the start of February of this year, Lithuania banned the transport of Belarusian potash through its terminal in Klaipeda, ostensibly stranding Belarusian potash exports. When Putin invaded Ukraine, the situation in the potash market became unprecedented in terms of supply dynamics. Now Russia's exports would be constrained as well and would have to scramble to find new port capacity, arrangements, and even end buyers.

But what is potash and why is it important?

The term "potash" refers to a group of potassium (K) bearing minerals and chemicals.

According to Canpotex, potassium improves a plant's overall health and boosts crop yields. Potash is important for agriculture because it improves water retention, yield, nutrient value, taste, color, texture and disease resistance of food crops. It has wide application to fruit and vegetables, rice, wheat and other grains, sugar, corn, soybeans, palm oil and cotton, all of which benefit from the nutrient's quality-enhancing properties.

Potassium is one of three essential elements for plant growth, the others being Nitrogen, which helps a plant's leaves grow, and phosphorus, which supports a plant’s root growth and flower and fruit development.

The improvement of fertilization application has enabled a massive growth in global crop yields since the Second World War and enabled an unprecedented explosion of the world's population, especially in emerging markets.

During the 2000s, the attention of global investors was fixated on supplying the growing demands of the consumers of emerging Asia, and China in particular. One of the most powerful narratives prior to the Great Financial Crisis was that the first thing that the Chinese would do as they gained more disposable income would be to eat more meat – long considered to be an unattainable luxury under the communist regime.

It was calculated that every kilogram of chicken raised would require 2.5 kilograms of feed. A kilo or pork would require around 4x as much feed and beef up to 7x times more feed.

This suggested an unprecedented demand for agricultural commodities, and Canpotex and BPC controlled 70% of the production of an essential element for raising crop yields.

Potash prices skyrocketed.

I made one of the most successful investments of my career by loading up on a company called Anglo Potash, which was originally called Anglo Minerals until I told them that no one knew that they were a potash company and that that they should change their name. The investment fund that I worked for bought a massive amount of shares. I also convinced most of the traders that I worked with at sell side institutional brokerages to buy Anglo Potash shares. They tended to cover larger companies and loved good small cap ideas for their personal portfolios.

Anglo Potash was run by a clever guy named Todd Montgomery who anticipated that the world would soon need more potash and bought up the rights to land surrounding the biggest potash mines in Saskatchewan.

Anglo Potash would eventually discover the Jansen project, which led to them being bought out by Australian mining giant BHP Billiton in May of 2008. We had started buying share at around $0.60 CAD. BHP Billiton bought us out at $8.15 per share cash. They wanted potash and did not want to share. This turned out to be perfect timing for Todd and my syndicate, but not so much for BHP Billiton, which bought just prior to the Great Financial Crisis.

Markets crashed and potash prices fell, and the cartel duopoly collapsed.

Last August, 13 years after buying the Jansen project, BHP Billiton finally decided to go ahead with developing this massive project with an estimated cost of 5.7 billion USD. This mine should begin to produce potash no earlier than five years from now before ramping up to full production of 4.35 million tons of potash in its seventh year of development.

BHP Billiton's delay of the Jansen project is perfect example of the lack of capital investment in expanding supply of critical commodities over the past decade and a half. It also manifests the inelasticity of new potash supply in the short and medium terms.

Consequently, the constraint of 38% of the world's potash is going to have a massive impact on potash prices for the near future, which will only serve to exacerbate the impact of restricted or blockaded agricultural products from Russia as well as from Ukraine. This will have a continued impact on higher food prices. 

Nutrien, the world's biggest producer, said it will increase potash production by 40 per cent above its 2020 level, putting it on track to produce 18 million tons a year by 2025, because the war in Ukraine has created uncertainty about supply coming out of eastern Europe. However, even this increase of supply will not be enough to offset supply disruption and a reduction in potash production this year as well as in the future. In 2022 it is estimated that Russian potash production could fall between 10-40%, while Belarusian production will decrease 60-70%, and the effect of this contraction will only really be felt in the second half of this year.

Back in 2008 potash prices rose to staggering heights due to a pricing duopoly.

Now there will only be one cartel that calls the shots, and it look set to become one of the most profitable cartels of all time.

Commodity markets are cyclical. When demand exceeds supply, price soar, incentivizing new production. New production usually overshoots demand resulting in excess supply and lower prices. These cycles take time to develop, but it is clear to those that have experienced previous cycles or have studied economic history that the general underinvestment in potash capacity and several other key commodities is set to spark one of the most significant commodity cycles of all time.

A new supercycle has begun and it has a long way to go.

The Latvian version of this article originally appeared in the July 2022 issue of Forbes Latvia.