Taking a long view of potash producers
I checked my portfolio a couple of days ago to notice that Compass Minerals, one of my larger positions, had fallen 24%.
Potash is a fertilizer. And its supply is controlled by two oligopolies. There's Canpotex, which is the North American suppliers (Potash Corp of Saskatchewan being the largest) and the Belarussian Potash Company, which is a joint venture between Belaruskali and Uralkali. New supply exists, but it takes effort to bring it online, since potash is a bulky commodity. Generally, demand for potash is expected to rise, as a growing world population requires crops and meat (and meat itself requires quite a lot of crops to feed).
Yesterday, though, Uralkali quit BPC in a huff. It accused Belaruskali of making potash sales outside the cartel. Generally, oligopolists sell at a price that will maximize their profits, because they can. They can control supply. If one member of the oligopoly cuts prices, that will often start a price war, and generally, price wars don't end well as prices decline towards the marginal costs of production. That's what the market fears in this case. This isn't going to be exactly a traditional oligopolistic situation, I think, because potash is a fairly heavy commodity. Uralkali could certainly ship potash over to the Americas, but that would raise the price.
It's not clear, exactly, what is going to happen. Likely Canpotex will reduce its own production to contract supply. They are going to have an inherent cost advantage in North America, which could blunt the effect of a price war among the BPC folks. The Russians may be crazy, but you would really have to be quite crazy to sell below your marginal cost of production.
This not not good news, of course, for Potash Corp and Compass Minerals, both of which are CAPS picks and the latter which I own myself. But I'm taking a long view, and Compass' main business is highway de-icing salt in any case. Compass' current price is a few percent above my cost basis, and I'm content to hold. I'm not interested in buying Potash at this point, as I do want to not put too much of my portfolio in commodity producers.