As the president and CEO of Inmet—a Canadian copper miner with global operations—Jochen Tilk dealt with everything from illegal strikes in Papua New Guinea to runaway costs in Panama and environmental protestors in Spain. But when he takes over as CEO of Potash Corp. this summer, Tilk will be facing a whole new set of problems.
For years, Potash Corp. has been the gem of the Saskatchewan economy—and one of Canada’s most profitable companies, with net income of $1.8 billion and EBITDA of $3.3 billion last year. But recently it has run into trouble. The company sold less potash in 2013 than it did in 2012, even as the price for a tonne of the fertilizer dropped—by about 30% in major markets. In December, its stock languishing near a four-year low, the company laid off 1,045 employees—about 18% of its total workforce.
Around the world, global potash demand has been flat since 2007, while global production capacity has increased. Making matters worse, India, one of the world’s largest fertilizer customers, has cut the potash subsidies it pays to local farmers. China, another large customer, has increased domestic potash production. New competitors, including Australia’s BHP Billiton, are lurking on the sidelines. And perhaps worst of all, the export cartel model, the one that all but made the Canadian potash business what it is, is in danger of falling apart.
In other words, welcome to the neighbourhood, Jochen. Hope you’ve got a plan.
Tilk’s appointment was announced in April. He takes over the top job from Bill Doyle, who led Potash Corp. for 15 years. Doyle built the company into a global powerhouse and became such a bombastic champion of the resource that one wag dubbed him a “rock star in the fertilizer world.” (One imagines Doyle on an arena tour in retirement, playing to sold-out crowds of adoring potash junkies.)
Among other things, Doyle was a persistent, outspoken advocate of the potash cartel model. It’s easy enough to see why. By limiting supply to the market, the two cartels—BPC, a partnership between the largest Russian and Belorussian companies, and Canpotex, made up of Potash Corp. and junior partners Agrium and Mosaic—helped drive the average price of potash from a historic range of between $125 and $200 a metric tonne to, at one point in 2009, $825 a metric tonne. Along the way, the Potash Corp. stock climbed from about $4 a share in 1999, when Doyle became CEO, to more than $80 a share in 2008, before settling back down to between $30 and $50 a share in the years since.
Doyle has never been shy about the role of what he calls “market discipline” in his company’s success. But as he prepares to hand over Potash Corp. to Tilk, that discipline is eroding. Last summer, Uralkali, the Russian half of BPC, pulled out of the Eurasian cartel. In the months since, the company has ramped up production at its mines and driven down global prices as it competes openly for a larger market share.
Initial reaction in the industry positioned the move as a temporary spat between the Belarussian and Russian producers. Some still believe it is. Spencer Churchill, an analyst at Paradigm Capital, thinks that even if the two companies don’t formally make up, they will start acting more rationally. “They might not form an actual marketing partnership officially,” he says. “But I think both players understand that the profit-maximizing imperative of a cartel is always more powerful than two players beating each other up with volume over price.”
Others aren’t so sure. In March, Belaruskali, the state-owned Belarussian company that used to form the other half of BPC, announced it was increasing its own potash production. In a note to clients, Michael Levshin, an analyst at Veritas, wrote that that likely meant one of two things. Either Belaruskali is flexing its muscles and showing off its independence from Uralkali, which means negotiations on reforming the cartel are likely to be protracted and could fail, or Belaruskali is joining Uralkali in the new potash world, abandoning market discipline to compete for market share based on price.
Either way, Levshin thinks the way forward for Potash Corp. is clear. “I’m of the mindset that they should go the way of Uralkali and go fully competitive,” he says. “I do not believe their current model is sustainable, where they are the only ones restricting supply.” In fact, Levshin believes the company may well have hired Tilk to do just that. “The only reason—I think—you would bring in an outsider, is a change of strategy,” he says.
For Tilk, neither choice will be easy. Either he doubles down, sticks to the low-production model and hopes the unpredictable Eurasians kiss and make up, or he scales up production and competes on price, walking away from a marketing strategy that made Potash Corp. one of Canada’s most successful, and profitable, companies. Michael Burt, an economist and director of the industrial economic trends group at the Conference Board of Canada, thinks the chances of the latter happening have gone up. But even without Russia, he says, the cartel model could survive, for a time. “Between them, the other major producers control enough of the market that they can, if they choose, allow the Russian producers to take up some market share, and they will give up a little market share and maintain prices at higher levels,” he says.
In the long run most analysts expect demand for potash to increase, as a growing global population looks to maximize yields from its shrinking pool of arable farmland. But potash supply, too, could mushroom significantly. Lurking in the wings of all this is BHP Billiton. The Australian mega-miner has never given up its dream of entering the potash business in force. Blocked from buying Potash Corp. by Canadian government decree in 2010, the company has instead sunk billions into developing its own Saskatchewan site at the Jansen Mine, which, if fully operational, could become the largest potash-producing site in the world.
If the cartel system continues to break down and potash prices sag much further, the economics of that project may become impossible to justify. But that in turn could open the door for BHP to make another run at Potash Corp. For Tilk, there would be some irony in starting at Potash Corp. only to face a takeover bid. His last job at Inmet ended after he failed to fight off a hostile takeover from First Quantum Minerals. Tilk has yet to give any interviews as CEO. But in an April statement he indicated that, for now at least, he’s happy to follow Doyle’s lead and stick to the cartel model. “Potash Corp. has grown and benefited enormously under Bill’s leadership and the strategies that have created tremendous long-term value,” he said. “I share his philosophy…and plan to build on this strong foundation.”