The world's top potash producers may abandon attempts to rein in output to keep prices high, switching to a strategy of ramping up sales as they face rising competition and big buyers of fertilizer take an increasingly aggressive stance.
Such a shift would change the game for the giant North American and Russian-Belarusian producers, which export the fertilizer through Canpotex Ltd and Belarusian Potash Co,
Instead of reining in output to support prices, and then selling potash to big buyers in contracts that set a benchmark for other deals, the miners might maximize sales through marketing organizations in what some see as a throwback to cartels of the past for commodities such as coffee, rubber and tin.
By boosting sales volume, the established producers could drive down prices to the point where opening new potash mines might make no sense for competitors.
Canpotex and BPC account for about 70 percent of world exports. If that dropped to 50 percent as competitors open new mines, "reasonable economic players" will simply not implement the current strategy stressing price rather than volume, Vladislav Baumgertner, chief executive of Russia's Uralkali OAO, told Reuters in an email.
"In this situation, we will look more like traditional industries: the main competitive advantage will be the production costs and the cost of capacity expansion," he said, warning that the addition of any more potash from newly opened mines could overload the market.
Canpotex and BPC, and the producers behind them, face supply challenges from new mines planned by BHP Billiton Ltd, K+S AG and a raft of junior players, as well as pressures from buyers smelling an opportunity to seek deals on more favorable terms.
But Baumgertner said he doubted that many of the proposed mines will get built, because potash prices are too low to make them viable.
Demand for potash, a nutrient that improves yields of corn, rice, palm and other crops, boomed in the past decade as diets and incomes improved in developing countries and demand for food rose.
Prices soared in 2008, prompting an unsuccessful, $39 billion bid for Potash Corp of Saskatchewan, the world's biggest producer by capacity, from global mining giant
They fell back in 2009 and bottomed out in 2010 as farmers balked at sky-high prices. Potash recovered modestly in 2011 before drifting lower last year. While most in the industry continue to see strong demand growth long into the future, some question whether there is too much new capacity being readied, a case that has gained momentum with the current lackluster
Spot prices for potash are now around $460 per tonne, well below the price of $550-$600 that Mike Wilson, CEO of No. 3 Canadian producer Agrium Inc, sees as needed if new entrants are to make money.
"Every one of these (potential rivals) are getting their capital cost reports and they're cringing," Wilson told Reuters in an interview. "They're sitting there choking."
A BHP spokesman declined to comment on what potash price it requires for the board to give final approval to its Jansen, Saskatchewan mine, but pointed out that hundreds of people
continue to work on building the project.
While the new mines pose big questions about the future of the market, the present hasn't been so hot either.
China and India, the two big importers whose purchases traditionally set a floor for global potash prices, stayed out of the market for much of 2012's second half, bruising Potash
Corp's balance sheets.
Deals that China and India eventually signed included steep discounts on big volumes, and the two are also taking small steps to loosen their dependence on Canpotex and BPC with deals to buy future mined potash from upstarts Prospect Global Resources Inc in Arizona and Karnalyte Resources Inc in Saskatchewan, respectively.
But existing producers still have advantages against new entrants, because it's cheaper to expand existing mines than to build new ones.
Shifting the priority to volume from price would be ironic for Potash Corp, given that concern about the BHP bid for Potash Corp centered partly on fears that BHP would not curb output and weaken Canpotex, which handles sales of Saskatchewan potash from Potash Corp, Agrium and Mosaic Inc.
BPC handles sales for Uralkali and Belaruskali.
"You've got to get some wind back in your sails to get prices back moving up," Potash Corp Chief Executive Bill Doyle said of his own company on a Jan. 31 analyst call. "Of course, the wind for us is volume. We focus so much on price, but you've got to have some volume coming back in the market."
Potash Corp shut several mines for weeks at a time this winter, seeking to match supply to demand.
But Agrium's Wilson said a lower price is no guarantee of extra sales. "We've got to strike the right balance," he said.
Canpotex member companies say they do not co-ordinate production to set prices, the traditional mark of a cartel. But they conduct off-shore sales and co-ordinate transportation
through Canpotex in an arrangement that critics say is cosy.
"It's not a clear-cut situation," said Mike Burt, director responsible for industrial economic trends at the Conference Board of Canada. "I can't really say what's going on inside the organization. The public statements are that the companies are setting their own production. But it's obviously a fairly close relationship."
He said the global potash trade might best be described as an oligopoly, dominated by Canpotex and BPC. It can be compared to the iron ore sector a few years ago, when a few big producers set market prices with Japanese steel buyers.
That situation changed when China became the world's dominant buyer, and BHP Billiton switched to a strategy of maximizing volume, establishing itself as the low-cost producer.
Canpotex declined requests for an interview.
Canpotex and BPC struggled in 2012 to maintain their bargaining clout.
With China and India on the sidelines, North American potash supplies ballooned to 37 percent over the five-year average in December. And while Potash Corp does not see many of the planned mines getting built, it still expects global capacity to grow 24 percent to 77 million tonnes by 2017.
BHP is digging two mine shafts in Saskatchewan for what would be the world's biggest potash mine, ahead of a final board decision this summer. Germany's K+S started work on its mine in the Canadian province last summer. But Vale SA recently delayed projects in Canada and Argentina.
In a recent report, Scotiabank analyst Ben Isaacson said a volume-over-price strategy could help Potash Corp by frightening away competitors and reducing the per-tonne cost of production.
"Perhaps one of the most important benefits of dropping potash prices to the low $300s (per tonne) would be that the continued spending of capex by almost all greenfield sponsors
would no longer make sense. We believe the majority of greenfield projects, including many brownfield expansion projects, would be shelved," Isaacson wrote.
Among the big buyers, fertilizer companies and farmers in India would respond quickly if prices fell to compete better with urea, a more common nitrogen fertilizer, said a senior
official from an Indian fertilizer co-operative, who declined to be named.
But it is hard to predict what will happen. The Indian government plans to cut its fertilizer subsidy for 2013/14 to take advantage of lower potash prices.
Ultimately, whether potash producers change course depends largely on decisions in the boardrooms of potential rivals.
"It's tough for us to get a picture on when those projects will come to market," said Rick McLellan, Mosaic's senior vice-president of commercial sales. "Our strategies will develop
as new competitors enter."