New Game Plan for Potash

Potash Corp. of Saskatchewan is one of three Canadian potash producers who Canpotex.  Canpotex handles all of their sales outside North America.  Two other similar organizations are Belarusian Potash and International Potash.  These three entities control nearly 70% of the world’s potash production.

By cooperating with each other, they are able to mitigate any decreases in prices and as we saw in 2008, increase pricing far above what most farmers felt it should have been (anybody remember $1,000 ton potash prices).

Even if the bid by BHP fails, Canpotex faces long-term pressure.  Such organizations work best with the following situations:

• There are limited number of producers,
• There are barriers to entries by other competitors, and
• There is homogeneity in the product.

While the barriers to entry in potash are high, they may not be high enough.  BHP is already developing the Canada’s huge Jansen field and big miners live BHP and Vale like to keep production running full steam.  If they can bring on the 13.5 million metric tons of supply that they target over the next few years, then the big three’s combined share of capacity will drop to 55% from 70%.

If BHP is successful in obtaining Potash, then the market would be changed dramatically.  Assuming all proposed new projects materialize, BHP would control 24% of global capacity by the end of this decade versus about 38% for Canpotex and its two sisters.

By running flat out, BHP would cause prices to drop, however, as high cost producers drop out of production, prices may start to increase.

For more information, please see this article by the Wall Street Journal (you may need to be a subscriber to read all of the article).