Investors in potash stocks may want to think twice before making short-term bets on the industry soap opera playing out in Russia.
Potash stocks jumped on Monday as investors interpreted reports out of Russia as signs of a potential reconciliation between the two companies that formed the world's largest potash oligopoly, Belarusian Potash Co.
But analysts caution that the gains may be short-lived, given the continuing tensions in the BPC group, as well as the threat of increased global production of potash in coming years.
Shares of companies such as Potash Corp. of Saskatchewan Inc. and Mosaic Co. have fallen by about 20 per cent since late July when OAO Uralkali of Russia said it was leaving the BPC joint venture with rival Belaruskali of Belarus. Investors fear the breakup would result in lower potash prices, and reduce margins for potash producers.
On Monday, Potash Corp. and Mosaic shares each rose 5 per cent amid speculation billionaire investor Suleiman Kerimov may sell his 22-per-cent stake in Uralkali. That could signal a change in strategy and potential "return to co-operation," Russian-based analyst Kevin Whyte told Bloomberg. Financial media in Russia reported that billionaires Mikhail Gutseriev and Vladimir Evtushenkov are looking at buying the interest.
That follows Russian President Vladimir Putin's statement at the G20 summit on Friday that the oligopoly dispute "needs to be resolved."
Until recently, potash companies have been seen as relatively safe stocks since two-thirds of the world's sales were controlled by two marketing organizations – BPC and Canada's Canpotex, which includes Potash Corp., Mosaic and Agrium Inc. The breakup of BPC threatens to forever change that cartel-like system, and send prices tumbling. Analysts, and Uralkali itself, have said they expect the breakup of BPC to send potash prices falling by 25 per cent in the coming months, to about $300 (U.S.) per tonne, down from about $400 this summer.
Investors are instead hoping for a happy ending that sees BPC put back together again, and the price of their potash stocks bounce back.
"A lot of investors want to believe that eventually Russia and Belarus will market potash again together," said BMO Nesbitt Burns analyst Joel Jackson, who suggests investors should be cautious about interpreting the recent news. "Every day there's new speculation. In the end you want to focus on what the players are actually doing in the business. We've seen prices come down significantly and we've seen Uralkali and Belaruskali go into the market on their own. Until we see differently, there is no reason to think they are getting back together again."
Uralkali is expected to shed more light on its strategy when it releases its latest financial results on Tuesday. "The risk is if Uralkali reiterates its go-it-alone strategy during [Tuesday's strategy call] and … potash industry stocks fall back," Mr. Jackson said in a note to investors on Monday.
National Bank Financial analyst Robert Winslow argues it will be tough to go back to the old system now that buyers in places like India and China have for weeks been told the industry is changing.
"I would argue that the horse is out of the barn and it will be tough to get them back in," Mr. Winslow said.
For John Stephenson, portfolio manager at First Asset Investment Management, any short-term lift in potash stocks is a time to sell, given the uncertainty that surrounds the sector.
"Even if some arrangement happens [with BPC] there is no guarantee they will abide by it," Mr. Stephenson said.
He notes Uralkali's chief executive Vladislav Baumgertner is in a Belarusian jail, facing a sentence of up to 10 years on charges of abusing power and seeking gain at the expense of Belarus as BPC chairman. Potash is an important commodity in Belarus, accounting for 12 per cent of state revenue.
"All of the dysfunction that led to this point is not really being solved at all," Mr. Stephenson said, adding there is also the threat of new potash projects that, if developed, could add more supply to the market and lower prices.
"There's no compelling reason to be a long-term investor in these names at this point in time. I would take the lift you are getting in the next day or so and run with it," Mr. Stephenson said.
With files from Reuters