Everything You Need to Know About Potash

A primer on a product that helps feed the world.

| More on:
The Motley Fool

By Gaurav Seetharam

Most Canadians have heard the term “potash” in the news, either during the 2010 takeover attempt of Potash Corp. of Saskatchewan (TSX:POT, NYSE: POT) by Australia’s BHP Billiton, or this earlier summer when a Russian mining cartel was dissolved. People have a vague sense that it’s a big piece of Canada’s exports, yet there’s a fundamental misunderstanding of what potash is. Here’s a primer for potash beginners. If you’re already up to speed, stay tuned for a future post on my take on the future of the industry.

What is potash?
Potash is one of the most important commodities around. Deposits have been found around the world wherever prehistoric oceans used to exist. When those oceans evaporated, they left behind a residue of potassium-based salt that our ancestors called “pot ash”. It isn’t a widely known commodity like gold or silver, but it’s vital to the production of our food. Although it has some industrial uses, 90% to 95% of all potash is used in agriculture as a fertilizer. Potassium is one of the three primary nutrients necessary for plant growth. It strengthens plants against drought and severe weather.

Who are the key players?
Since the dawn of time (or maybe it just feels that way), around 70% of the potash market has been dominated by two consortiums: The Belarusian Potash Company and Canpotex. Canpotex, a Canadian partnership, is wholly owned by Agrium (TSX:AGU, NYSE:AGU), Mosaic (NYSE:MOS), and Potash Corp. of Saskatchewan. The Belarusian Potash Company is a joint effort by the state-owned Belaruskali, Belarusian Railways, and Uralkali.  

What is the virtue of a consortium?
It’s all about efficiency. Customers of the potash industry can range from giant agriculture corporations to the independently owned farm. They can be located in Manitoba, or Brazil, or China, or India. It’s an export-heavy business, and the logistics can get both tricky and expensive. And that’s where companies get together and realize that by pooling their resources, it may be possible to achieve economies of scale.

Uralkali Makes an exit
Earlier this year, the markets were taken by surprise when Uralkali announced a unilateral dissolution of BPC’s joint venture. It was a startling move that caused a lot of panic.

potash

Source: Morningstar.com; (POT is blue)

Both Mosaic and Potash Corp. fell more than 20% in a matter of days, while Agrium managed to walk away with just a few bruises. That seems reasonable when you consider that Agrium’s stake in Canpotex is just 9%, and Mosaic and Potash Corp. own 37% and 54%, respectively.

Why the panic?
So, here’s where it gets interesting. When Uralkali announced that it was going solo, it also declared an intention to raise production by more than 30% in the next year. Markets believed that this sudden surge in the supply of potash was going to depress prices, and ultimately hurt the bottom lines of Mosaic, Agrium, and Potash Corp.

But that left me with too many unanswered questions. If we’ve established that the reason for operating in a consortium is to create efficiency, then how can Uralkali start a price war by going solo? If its marginal costs are going to rise, how can it increase production and invest in its own supply chain infrastructure? It just didn’t sit right with me, so I did a little bit of digging. The results were too long to squeeze into this article, but it will all be included in tomorrow’s post on the potash industry.

Disclosure: Gaurav Seetharam does not own shares of any companies mentioned.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

money cash dividends
Stocks for Beginners

Where to Invest $10,000 in April 2024

If you've already created a diversified portfolio and are looking for more options from a windfall, here is where I…

Read more »

data analyze research
Investing

The Ultimate TSX Stock to Buy With $1,000 Right Now

Brookfield Asset Management (TSX:BAM) is one of the best Canadian stocks to buy for those looking to put capital to…

Read more »

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »