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By Matthew Coffina, CFA and Jeffrey Stafford, CFA | 09-10-2013 02:00 PM

Uncertainty Reigns in the Fractured Potash Industry

As the clash among Eastern European producers has caused a rift in the global potash market, the long-term outlook remains in question for investors, say Morningstar's Matt Coffina and Jeff Stafford.

Matt Coffina: For Morningstar StockInvestor, I am Matt Coffina. I'm joined today by Jeff Stafford, who is an equity analyst on our basic materials team, and we're going to talk about recent developments in the potash industry.

Jeff, thanks for joining me.

Jeff Stafford: Thanks for having me, Matt.

Coffina: In recent years, the potash industry is operated as what we consider a rational oligopoly. Can you explain what this means?

Stafford: The potash industry is very concentrated. The top five or six producers in this space control about 80% of production capacity. On top of this, the top four producers, PotashCorp, Uralkali, Belaruskali, and Mosaic, are part of two large marketing organizations that act in a cartellike fashion. What this means is these companies, during periods of slow demand, actually shut in production to better match demand with supply to help preserve prices. And that has led to an industry with potash prices well above marginal cost of production for several years now.

Coffina: Recently, there have been some signs that this market structure could be breaking down, in particular, a dispute between Russian miner Uralkali and Belarusian miner Belaruskali. What do you think is behind this dispute?

Stafford: The main reason behind this dispute is Belaruskali was going outside of Belarus Potash Company, the cartellike marketing organization, to sell potash to international players, and they legitimize this with a new law in Belarus. This upset the Russian producers and Uralkali and led to a breakdown in relations between the two companies, and ultimately led to Uralkali leaving BPC and choosing to market its potash on its own through its own trading company. And next year, Uralkali will operate at 100% of capacity and pursue a volume-before-price strategy, which runs opposite to what industry players had done in the past.

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