Research Notes

Global demand for potassium fertilizers slowed down in 2005, but prices continued to rise. At present, global potassium fertilizer prices stay at their record highs, as a result of which it would be logical to expect a decline in potassium chloride prices and profit margins of potassium producers, including Russian ones. However, due to the unique feature of fields and high barriers for the entry into the industry the potassium market retains the status of "a bid market". The recent conflict between Chinese, Indian consumers and largest potassium manufacturers, in which the latter came out on top, once again confirmed the firm standing of potassium manufacturers. One could expect that global prices and, consequently, margin showings of producers will not deteriorate in the mid-term outlook. Furthermore, facing imminent hikes in the cost side global producers could make other attempts to jack up potassium prices in a bid to maintain current margin levels. Taking advantage of fairly low production costs, Russian potassium fertilizers producers, UralKaliy and Silvinit, will be able to generate high profits for quite long.

In addition, meeting rising demand domestically Russian potassium fertilizer producers have been attempting to pursue a policy of establishing domestic prices at highest possible levels against global ones.

However, the standing of Russian potassium producers could be seriously undermined after 2012 on both domestic and external markets. First, at present Southeast Asian countries, Argentina and Middle East nations are exploring the possibility of expanding facilities to manufacture potassium fertilizers. In view of the fact that around 35% of aggregate Russian exports falls to China, Brazil and India which are geographically close to the nations which plan to expand potassium production facilities, Russian enterprises are under threat of losing a large share of major sales markets. Under the worst-case scenario, the startup of new facilities will lead to a collapse in global potassium prices. Second, in 2013 the Russian market will see the appearance of another player, EuroKhim, which has already commenced development of the Gremyachinskoye field, which it acquired. It plans to grab a share of the domestic potassium market and also squeeze those of UralKaliy and Silvinit on the global market.

Despite the expected negative trends, UralKaliy and Silvinit have already taken measures to bolster their competitive advantages by means of large-scale investment programs.

In this research note we revised our target prices for the shares of these two Russian major potassium fertilizer products, making forecasts on the basis of industry trends and price expectations. Taking into account end-2006 prices, which we found in the course of the valuation procedure, and the fact that the Russian stock market has already priced in stocks of these potassium fertilizer manufacturers, we assign a Hold recommendation to UralKaliy shares and downgrade our recommendation on Silvinit shares to Sell.

Anastasia Sarapultseva

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