A leading supplier's decision to break up the cartel has important implications for the price of potash as well as large fertilizer companies, says Moneyshow's Jim Jubak.

The problem with cartels is well they fall apart.  OPEC, which has lasted for a long, long time, the cartel that controls a large percentage of the world’s oil production, is really the exception.  It’s had an enormously long life because it has a certain cohesion of self-interest that has managed to survive all kinds of political and economic changes.  More typical of the cartel is what happened on July 30 with the potash cartel.  It’s really two cartels, one Canadian, one from the Ukraine and the former Soviet Union that control pretty much all of the potash supplies, about seven companies. 

The problem of course is that if you’re a cash strapped company as opposed to a cash strapped country as in OPEC, you have a strong incentive to try to break the cartel in order to gain more volumes to keep yourself a float, so that’s what happened on July 30 when a company called OAO Uralkali, which is the largest potash producer in the world, announced that it was going to break its cartel.  They basically had a partnership with Belarus to control potash production for Soviet Republics and it was going to break that agreement and essentially by that it was going to break the larger agreement with all seven potash producers and it was going to increase production from, well the target is about 10.5 million metric tons in 2013 with a goal of maybe 14, so going from 10.5 to 14 million metric tons in 2015. 

Huge, huge increase in production at a time when most potash producers have been cancelling or delaying projects, in the case of Potash of Saskatchewan taking mines out of production in order to keep potash prices steady.  The goal has been to move them up to somewhere around $400 a metric ton.  It would still be a huge, huge drop, but the high potash was going for about $900 a ton, so $400 is really low, but the point is that they’ve been trying to move it up from a little less than $300 to that $400 range. 

It now looks like with the production increases from Uralkali that we’re looking at prices dropping back down to $300, $400 is out of the question, and that’s going to be a big problem, not to everybody in the world to the same degree, but it’s certainly going to hurt high cost producers, such as the German producer K&S.  There is some likelihood that it’s going to hurt North American producers, not because they have high costs, but because there is some likelihood that Uralkali and its Belarus compatriot will export more to North America in an attempt to gain market share they’ve got to sell this stuff somewhere if they’re going to increase production on all of that. 

All this means is that prices are going down.  The potash stocks took a huge hit; Potash of Saskatchewan dropping from around 40 to around 30.  Analysts are still in the process of cutting their earnings estimates, cutting their price targets, so I think it’s too early to buy, but what you’d like to do when you look at this is think about the long-term trend is for more global need for fertilizer as you need more food production from the world, so you like that trend over the long-term. 

In the short-term, however, you’ve got big, big capacity problem, too much capacity, not enough demand.  Some of that will be solved after the India elections because I think you will see the government subsidizing fertilizer a little more rather than just subsidizing food in the run-up to the election, so maybe 2014 you might see some turn here in demand from India, but in the meantime this is going to be kind of bloody, or whatever the appropriate image is for fertilizer. 

This is Jim Jubak for the Moneyshow.com Video Network.