Potash price hammered as Russians may flood market

Shares of major North American potash producers fellsharply Tuesday on word thata Russian company is pulling out of a marketing group and is expected to undercutcompetitors' prices for the fertilizer.

OAO Uralkali announcedTuesday it was withdrawing from a joint venture with another company from Belarus that set the price for abouta third of the world's potash supply. Instead, it planstosell more potash to China, which buys about one fifth of the world's supply of the fertilizer.

'The overall market is likely to remain in surplus for the next few years.' CIBC World Markets on the outlook for potash

"Our co-operation with our Belarusian partners has come to a deadlock,"Uralkali CEO Vladislav Baumgertner said in a statement posted on the company's website.

"In this situation we have to redirect our export deliveries through our own trader," he said, adding he wouldn't exclude the possibility of co-operation on a mutually beneficial basis in future.

Uralkalihas a much lower cost of productionthan rivalPotashCorp of Saskatchewan, which was briefly Canada's most valuable company in 2010 before the government stepped in and blocked a $40 billion takeover offer from Australian mining giant BHP Billiton.

Sharp selloff

"Uralkalis announcement completely turns the global potash market upside down," analystElena Sakhnova of VTB Capital in Moscow told Bloomberg.

"If previously global potash producers were acting like an oligopoly, working with the rule that benefited higher potash prices now the market will be fully competitive."

Uralkalihas expenses of roughly$170 for every ton of potash it produces. That compares with the industry average of $240 a ton, an agricultural analyst at Goldman Sachs noted in a report Tuesday.

The moves by Uralkali could move the price of potash below $300 a ton, the company's CEO warned Tuesday. The company derives about half of its revenue from sales to Asia, so it is better equipped than other rivals to supply potash to one of the few places where demand is still increasing China.

A spokesperson for the Saskatchewan government, which derives a significant amount of revenue from exporting potash, told CBC News the situation is being monitored.

"It is too soon to know the potential impact of today's announcement by OAO Uralkali on price, production and provincial potash revenues here in Saskatchewan," the spokesperson said."We will be monitoring these developments closely and speaking with Saskatchewan potash producers to gain a better understanding of the potential impact. We will also be evaluating the potential impact on potash revenues, which will be reflected in the first quarter financial report when it is released in August."

After a run-up before and after the global recession that began in 2008, the world potash market is currently oversupplied.

Global oversupply

"The overall market is likely to remain in surplus for the next few years," CIBCWorld Markets said in a recent research report."That implies that the outlook for prices will hinge to some degree on producers ability to maintain overall production discipline."

A major supplier pulling out of the cartel that had effectively been setting prices is a clear sign that discipline is ending, which meanscompanies will have to vie for market share while prices move lower.

Saskatchewan as a whole has the world's largestreserves of potash, with PotashCorp holding the lion's share. Canadian potash companies typically sell through a similar venture known as Canpotex, which is able effectively to set prices because of its size.

Shares in Canada's major potash companies sold off heavily Tuesday in reaction to the news. At one point, PotashCorpplungedalmost 25per cent in New York trading. The stock finished the day at $31.63, down $6.27 or 16.5 per cent.

Mosaicfell $9.40or 17.67 per cent to $43.81, and Agrium was down $4.93 or 5.39 per centto $86.50.

With the selloff, PotashCorp has now lost roughly 50 per cent of its value since the BHP Billiton takeover was blocked in 2010. Adjusted for stock splits, PotashCorp is getting close to the level it was at before BHP Billiton came on the scene.

The companylowered its earnings forecast by roughly 20 per cent last week, citing lower prices.

"Highly competitive markets around the world had an impact on our results," PotashCorp chief executive Bill Doyle said at the time.