Potash Stock Could Rise on Speculative Russian Merger - TheStreet

Potash Stock Could Rise on Speculative Russian Merger

Potential merger of Russian potash miners, Silvinit and Uralkali, will likely lead to further deals, reducing competition and driving up Potash, Mosaic and Agrium stock prices.
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NEW YORK (TheStreet) -- Potential merger between Russian potash miners Uralkali and Silvinit will consolidate the sector, with five major players controlling two-thirds of global potash production.

Other top sector players include

Potash Corp.

(POT)

,

Belaruskali

,

Israel Chemicals

and

Mosaic

(MOS) - Get Report

. These players, along with the merged firm, can easily match each other in either pricing or production volumes, which, in effect, will ensure higher prices in the long term.

Hence, investors can anticipate an increase in the sector profits and higher stock returns in the longer run. Russian billionaire Suleiman Kerimov bought a 25% stake in Uralkali, and a 20% stake in Silvinit this week. Kerimov, a senator and former State Duma deputy, has political clout to facilitate a merger between the two companies to develop the world's second-largest potash producer.

Since the end of 2008, fertilizer and agrochemical deals worth close to $11 billion were announced or completed, according to

Bloomberg

.

Vale

(VALE) - Get Report

,

BHP Billiton

(BHP) - Get Report

and

Rio Tinto

(RTP)

were among the companies acquiring these assets.

The Uralkali-Silvinit deal may trigger the interest of three big mining giants in the potash sector. Currently, BHP and Rio Tinto are looking for investment opportunities outside Australia

on concerns related to Australia's "super" profit tax

. BHP's Jansen project in Saskatchewan, Canada borders the Potash Corp's Lanigan.

Agriculture is the main driver for potash demand, accounting for 90% of the world's total demand. Plants require potash for maintaining solute movement, increasing resistance to stresses and disease, and for improving seed maturation and fruit quality.

With only 12 countries producing potash, supply is limited by potash's scarcity and expensive mining. Across-the-border potash trading is 80%, compared to 13% and 45% for nitrogen, and phosphate fertilizers, respectively, thus corroborating the reliance of many countries on potash imports.

In addition, a few companies dominate potash production. In 2009, the top nine companies accounted for 81% of the total global potash production, according to the

Arab Potash Company

. Potash Corp. production share declined to 8.8% in 2009 from 16.6% in 2008; the company down-scaled production to 3 million tons in 2009 from 8.6 million tons in 2008, as potash prices declined during 2009 on world-wide inventory buildup. Meanwhile, world potash production declined to 34.2 million tons in 2009 from 51.9 million tons in 2008.

Other major potash producers, Belaruskali, Israel Chemicals, Mosaic and

Agrium

(AGU)

contributed 14.7%, 13.2%, 11.1% and 4.1% of total potash production, respectively. Russian giants, Silvinit and Uralkali had a 10.3% and 7.6% share in the world's potash production, respectively.

Herfindahl-Hirschman Index, based on the market concentration of the top nine potash companies in 2009, was 837, implying intense competition in the industry. HHI is a common measure to indicate industry rivalries. A market where the index is less than 1,000 is presumed to have high competition, between 1,000 and 1,800 moderate concentration, and above 1,800 points is regarded as highly concentrated.The merger of Silvinit and Uralkali will push the sector's HHI to nearly 1,000 indicating moderate competition. This apart, a lesser number of major players juxtaposed with the global dependency on potash supply for 12 countries will provide the competitive edge.

Competitive advantage allows producers to maintain production-demand equilibrium. Such a scenario will likely persist, at least for a few more years. The entry of new players is limited, since it takes several years to bring a new mine to production and a few more years to break even on the high capital investments.