The prospect of new competition from miner BHP Billiton could dynamite the cracks appearing in a potash duopoly that accounts for 70 percent of global trade in the fertilizer.
For decades two export groups, Belarus Potash Company (BPC), which represents producers in Russia and Belarus, and Canpotex, its North American equivalent, have set identical prices in key markets such as China and India and have often curbed output simultaneously.
That choreography, which smaller players also dance in step with, is already under fire; four producers in the groups - BPC's Uralkali, and Canpotex's three members Potash Corp of Saskatchewan, Agrium and Mosaic - recently agreed to pay more than $100 million to settle a U.S. antitrust lawsuit accusing them of concerted action to raise prices.
Canpotex and BPC did not respond to a request for comment for this story, but the producers have denied the accusations, and Uralkali said,"potash producers and traders do not agree with each other on prices and pursue their own pricing policies."
Their footwork has also faltered under the strain of falling prices in recent months, and the music could stop altogether if BHP goes ahead with the 8 million tonne per year Jansen mine in western Canada, which would be the world's largest potash mine if it opens as scheduled in 2017.
BHP, which has said it will not join Canpotex, would probably look to maximiz volume sales to make sense of its $14 billion investment, "which would lead to lower prices unless or until some other major sites shut down," according to Paul Burnside, analyst at CRU Group.
The sector, once a backwater for global investors, moved center stage in the 2000s as booming demand in emerging economies lifted potash prices from around $150 a tonne to about $1,000 in 2008. Mining potash costs around $100-$150 a tonne.
Though prices have more than halved since, fat margins lured a slew of mining firms to the business.
BHP will make a final decision on the project in its next financial year starting July 1, though it has already spent $2 billion on its entry into the sector, a spokesman said.
Privately held EuroChem is also building two mines in Russia, and German producer K+S is developing one in Canada's potash-rich Saskatchewan province, both set to open in 2016-2017.
All of which poses a big threat to the duopoly's grip on the market, said a senior official at a potash producer.
Mosaic and Uralkali have both said they would put planned expansion projects on ice if BHP went ahead with Jansen.
Even without the extra output from Jansen, annual capacity is set to grow to 91 million tonnes in 2017 from about 68 million in 2012, outstripping average annual demand growth of 3 percent, according to Burnside.
Average potash prices have fallen from $450-$520 a tonne last year to $400-$430, as a long delay in supply contracts with China and India, which account for around 15 percent of global demand, pushed producers to compete in other markets.
"The rosy picture painted in the past of continued growth of 3 to 5 percent doesn't seem to be valid any more as some countries including China seem to have reached a saturation point in demand," the senior official said.
The recent months' slowdown has pitted Canpotex against BPC and member against member within the two groups.
"The market has changed significantly during the last year and a half. Now everyone is battling with each other, the market is not disciplined anymore," a source familiar with Uralkali and Belaruskali said.
According to industry sources, BPC was caught off guard when Canpotex signed a six-month seaborne supply contract with China on New Year's Eve 2013, slashing prices to $400 a tonne, $70 a tonne below the previous contract.
"Canpotex sacrificed price for volume. They were under pressure from investors after long delays in the contracts with China and India," one source said.
Though a disgruntled BPC followed suit, as usual, with its own contract on the same terms, Uralkali opted to use its exclusive land access into northern China to pump supplies on top of BPC's sea-borne shipments, upsetting both Canpotex and BPC partner Belaruskali.
Uralkali exported around 2 million tonnes of potash to northwestern China via rail in 2012, according to industry sources, accounting for 20 percent of the country's needs.
Taking the Long View
Sensing the threat, Canpotex has sought to expand its share in other markets, focusing on Malaysia and Indonesia, where the palm oil industry requires heavy potash application.
Over the past eight months, Canpotex has offered potash at reduced prices, biting into BPC's share of the Malaysian and Indonesian markets, which has shrunk from around 40 percent to 15 percent over the past year, the sources said.
Smaller players K+S and Israel Chemicals Ltd and Jordan's Arab Potash Company have also broken away from their traditional alignment with BPC and Canpotex pricing by offering competitive prices in Asia and Latin America.
Belaruskali is also rumored to have sold potash cargoes outside BPC.
"There is a conflict ... It's linked to the fact that the markets have fallen, profits are down, so some parties have started thinking that their profits could be higher if they were less hamstrung by obligations to a partner," a Belarusian source familiar with the matter said.
Ironically, low prices may yet dissuade BHP from giving the final go-ahead for Jansen.
Bill Doyle, Chief Executive of Potash Corp, the largest producer, certainly thinks Jansen would be a "colossal mistake," but BHP would hardly expect words of encouragement from that corner.
To make a return on a new mine, potash prices must hold at an average of $400-$500 a tonne, industry sources say.
The duopoly would nevertheless be unwise to hope that prices dip below that.
"Low potash prices might not be enough to deter BHP, which is looking at a 50-year horizon," one industry source said.