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Because potash deposits are concentrated in specific areas, a large percentage of the world’s potash capacity is held by relatively few players, including Potash Corp. (POT), Mosaic Co. (MOS), Uralkali, and Belaruskali. These companies, the largest four, make up about 68% of global capacity.
A more concentrated global market
The global export market is even more concentrated. Producers like POT, MOS, and Agrium (AGU), which together sell their potash through international marketing arm Canpotex, takes roughly 36% of the global market in 2012. Former Soviet Union countries, which include Belaruskali and Uralkali, together accounted for 35%.
Setting world prices
Up until recently, Belaruskali and Uralkali sold potash in the international market through the BPC (Belarusian Potash Company). These two distributors, Canpotex and Belarusian Potash Company, have historically set the prices for the international market, which also influences domestic prices—so they’re relevant for Intrepid Potash Inc. (IPI) too.
Since two (now three) major entities primarily control the international market, which makes up about 75% of world potash demand, the potash industry is a well-known oligopoly. It’s a market where a handful of sellers dominate a large percent of the supply. This can result in various forms of collusion in which competitors can coordinate with each other to reduce competition, increase prices for consumers, and achieve higher profits.
For example, Uralkali, Potash Corp., Mosaic, and Intrepid Potash had reported operating margins of 40.42%, 37.92%, 22.15%, and 19.81% over the past 12 months. By contrast, the companies within the S&P 500 (SPY) had an average of 13.99%.
High profitability is often considered a positive because it suggests certain industry or business characteristics allow companies to fend off competition. Companies with high profitability and low valuations tend to outperform over the long run. But investors should note why companies are able to achieve high profits and whether they can maintain them going forward.
© 2013 Market Realist, Inc.