Schafer: Markets matter, even when a cartel is involved

It is refreshing to hear a CEO of a major publicly held company talk openly about making big money operating in a cartel, in this case one selling into the global market for potash.

No spin or evasions from this executive. He was in a cartel, and did it ever work great.

The colorful and blunt-speaking CEO here is Vladislav Baumgertner, the general director of the Russian firm Uralkali.

Investors here care what he thinks because Uralkali is the largest player in a global market that's also big for the Mosaic Co. of Plymouth. Mosaic steadfastly argues that it's not the beneficiary of cartels — a case that would be easier to make if Baumgertner were to go on an extended vacation.

Baumgertner has been explaining why his company last week noisily quit an export partnership with Belaruskali, a big Belarusian potash producer. This news clobbered the stocks of global fertilizer companies and took $4 billion from the market capitalization of Mosaic in just a single trading day.

The Belarusians were planning to sell "without our agreement on volumes and price," Baumgertner said, in a translation of an interview published Monday in Vedomosti, a Russian business newspaper.

"The question here is not about price but about a unified trading position," he said. "If there is one leading trader, there is an opportunity to hold a tough negotiating stand, and customers cannot make different suppliers compete, trying to gain concessions by bargaining and so on."

It fell to Michael Rahm at Mosaic to explain Baumgertner's frankly spoken comments in the context of Mosaic's traditional free-market position on its industry.

Rahm, an economist, is Mosaic's vice president of market and strategic analysis, and he said "I cringe every time I hear the word cartel."

He must be aggravated a lot, as BPC and a similar association in which Mosaic is a partner, called Canpotex, are routinely referred to as cartels.

Potash is mined for its potassium, one of the three major nutrients in the fertilizer business. The top four players have about 60 percent of the global market. Two of them, Mosaic and the Canadian firm Potash Corp. of Saskatchewan, along with the smaller Agrium, export together through Canpotex.

In Eastern Europe the major players are Uralkali and its competitor Belaruskali, and up until last week they were working together through Belarusian Potash Co., or BPC.

Rahm characterized the potash market as having plenty of rivalries and competition, arguing that Canpotex sells into markets like Brazil but so do Potash Corp. and Mosaic directly.

He was at meetings with investors last week when that news from Russia broke, and over the course of the following days he gave this explanation over and over: Not much fundamentally has changed.

"What's been lost in the current discussion is that the fundamentals of the global potash market have been slowly eroding over the past couple of years," he said.

One reason is that the Indian government, like governments almost everywhere, has been trying to reduce its budget deficit, and fertilizer subsidies there run into billions of dollars. The upshot, Rahm said, is that Indian farmers this growing season are paying 260 percent more for their potash than they were in April 2010, and have cut back. And as demand contracts, prices decline.

Then there's the supply side. By Mosaic's calculations, when the potash price was moving up several years ago, the industry's total annual capacity was about 55 million metric tons. And it was running at full capacity.

That helps explain why Mosaic was selling potash into Brazil at about $550 per metric ton two years ago and now it's at less than $400 per metric ton, even though, Rahm said, "all the while this quote global cartel was having a price-over-volume strategy."

He said the best way to think of what's happened is that there was a guerrilla war going on between competitors that reflected the oversupply situation. All Uralkali did was make a formal declaration of war.

As to Baumgertner's PR campaign, well, Rahm says, he can't really say. It may be to pressure the Belarusians into selling assets to Uralkali.

Although Rahm thinks Ural­kali doesn't have the cost advantage Baumgertner touts, it may be that he's talking about increasing production to drive consolidation in the industry. If so he's at least being rational.

If Uralkali drives prices down enough, perhaps to the marginal cost of production for the weakest players, they may seek to be acquired. Plans to expand production will be mothballed. As prices decline, farmers will buy more fertilizer.

All of which suggests that farmers should enjoy this period of relatively low prices. It's not going to last.

lee.schafer@startribune.com • 612-673-4302