BHP takeover could shake up potash pricing control

WINNIPEG/TORONTO Fri Aug 20, 2010 5:57pm EDT

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WINNIPEG/TORONTO (Reuters) - BHP Billiton's entry into the potash industry through a bid for market leader Potash Corp could shake up a cozy system of pricing and production if, as some expect, the newcomer shuns existing arrangements and runs plants at full capacity.

A coterie of companies dominates the global trade in potash right now, using their clout to underpin prices when they are low and take advantage of a strong market when they are high.

The two big exporters are Canada's Canpotex, controlled by Potash Corp, Mosaic Co and Agrium Inc, and the Belarussian Potash Co, which groups eastern European producers. Canada, Russia, Belarus, Germany, Israel and Jordan account for roughly 90 percent of world supply.

BHP, for its part, has traditionally shunned such marketing groups, and runs plants at full capacity regardless of price. It said on Friday that if it is successful in taking over Potash Corp, it would ultimately look to pull out of Canpotex.

"BHP Billiton will work with the Canpotex shareholders in order to further understand existing agreements and establish the basis for a relationship that provides for continuous and undisrupted supply to export markets and ultimately permits BHP Billiton to market its potash independently," the company said in a filing with U.S. regulators.

The company said it would honor existing commitments and contractual arrangements Potash Corp has with Canpotex.

"If BHP comes in and decides to turn those plants on full bore and let them run, then it's going to be up to Mosaic, Agrium and the Russian producers" to scale back, said David Asbridge, president of NPK Fertilizer Advisory Services in St. Louis, Missouri.

"You could end up with a situation where we could see the cost of potash being $50, $75, $100 a metric ton cheaper than it is right now."

Potash is a key crop nutrient that analysts see becoming an even hotter commodity as the world's food needs grow. Its price peaked over $1,000 a metric ton in the commodities boom of 2007-08, but has since fallen back to between $350 and $375 per metric ton.

Asbridge said a possible combination of eastern European producers Belaruskali, Silvinet and Uralkali, could help calm price volatility if BHP opens production floodgates.

"It would put a little more restraint in the world system," he said.

There is no global shortage of potash, but it is expensive to mine and a small number of producers dominate the market.

In the 1970s and '80s, Canadian potash producers expanded too fast, keeping the nutrient stuck in a low $150 to $200 per metric ton range for many years, Asbridge said.

Today's higher demand comes as Potash, Mosaic and Agrium expand their existing Canadian mines, adding to both costs and supply.

Patricia Mohr, commodity market specialist at Scotiabank Group in Toronto, said some type of production curbs will be needed to support prices, even if demand rises as expected.

"The new capability requires much higher prices than what we have today to make it a worthwhile investment. You can't just flood the market," she said.

BHP's hostile takeover bid comes as U.S. farmers turn back to applying fertilizer after balking last year at high-priced applications to replenish their soil, Mohr said.

"They really mined the nutrients out of their soil last year .... But the demand for potash will start improving a lot from here on in."

(Additional reporting by Michael Erman in New York; Editing by Janet Guttsman)

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