Ben Aris in Moscow -

Russia has been mining potash, a pink rock that increases crop yields by up to a third and can lie as much as a kilometre under the surface, since Tsarist times. These days it is big business. Developing a major potash deposit costs many billions of dollars and there are only a handful of viable deposits scattered around the world. But for all this, over the last two decades it has been a quiet business. Three companies - Uralkali in Russia, Belaruskali in Belarus and PotashCorp in Canada - account for over three-quarters of global production.

However, things have started to change. A raft of greenfield projects are due to start coming on line in 2018 that will break up the de facto cartel between the three incumbents. And China, the world's biggest consumer of potash, is already playing hardball over price and has injected yet more uncertainty into what has been a very profitable sector.

Potash is the remnants of prehistoric inland oceans that evaporated, leaving behind potassium salts which make ideal fertilisers. The deposit of pink and white marbled, 17km by 4km potash that is the basis of Uralkali's production lies two and half hours drive from the city of Perm in the Urals and is the biggest producer in the world.

In 2005, Uralkali tied up with Belarus' Belaruskali, which exploits the other giant potash deposit in the territories of the former Soviet Union, to form the Belarus Potash Company (BPC) joint venture. This handles the trading for both companies and affords some monopolistic powers over pricing.

Earning money hand over fist - Belaruskali was reported as the most profitable company in Belarus at the end of May - the two companies have been investing heavily in expanding their operations. Uralkali has already increased its output from about 10m tonnes a year to 13m now, and intends to spend $600m a year for another eight years to increase its annual production to 19m tonnes by 2021.

But the current global slowdown has mucked up these plans, as demand has fallen, pushing prices down. Uralkali was forced to reduce production from the 10.8m tonnes it produced in 2010 - almost its full capacity at the time - to 9.1m tonnes last year. Its key customer China, which buys about 5m tonnes of potash a year, is holding out on signing the next contract. Uralkali wants to increase prices, but China is hoping to drive the price down from the $400 per tonne it paid last year. A new supply contract was supposed to be signed in June, but the two sides are still negotiating (There is a six-month contract in place running from January as a stop gap measure.) "China is more difficult as we have many different options. It is possible there will be a contract in the second half of this year. We are more cautious than our competitors on the prospects," says Vladislav Baumgertner, Uralkali's CEO. "We could sign a contract in the third quarter, but it would have to be at a discount to the current contract and we would like to avoid that. It depends on if the competition is ready to decrease the price or wait with us for a more favourable market and at least a roll over price or even a better price."

Baumgertner went onto say that if no contract is forthcoming, the company will simply reduce its production. And the prospects are not good: Uralkail recently revised its production estimates for this year down to 9.5m tonnes, which assumes no Chinese deal.

A lot depends now on what the other big players in the market will do: will they also hold out on China or cave in and strike a discounted deal? Baumgertner says he is taking a conservative view and expects global demand for potash to be 53m-54m tonnes this year, whereas the North American companies are predicting 57m tonnes. "The difference between these two estimates is exactly the demand from China," says Baumgertner.

Further out

Potash producers have been riding the global wave of agricultural shortages that is sending food prices soaring, and the expectation is for heavy investment into more food production as the world's population keeps growing. Naturally, most potash miners are planning to expand. Uralkali has two new mines at Ust-Yayvinsky and Polovodovsky in the works. Work on digging the shafts at Ust-Yayvinsky has already started and when complete in 2020, this mine should add 2.8m tonnes of potash to Uralkali's annual production.

And there are a slew of others, such as an ambitious project in York in the UK that is supposed to produce 5m tonnes, as well as the giant Jensen project by BHP Billiton in Canada, which could be given the go-ahead in just the next few months. In Russia too, EuroChem has already dug 570m of a 1km deep shaft to reach a very rich deposit of potash near Volgograd and has a second mine near Perm is due to start producing in about 2017. Together, they will add another 4.6m tonnes a year of supply to the market when at full capacity sometime around 2022.

All these new players and new volumes have created a great deal of uncertainty for the existing players. "Until the new greenfield projects go online in 2018, the structure of the market will remain the same and so there will not be big changes," believes Baumgertner. "However, after 2018 it is very difficult to forecast what will happen. There is a lot of uncertainty over the new projects, but we will definitely increase production if there is enough demand to make the utilisation rates of [the various facilities in development] economically viable."

Baumgertner says that Uralkali, like everyone else, will have to play it by ear and is prepared to suspend the development of some projects if there is an oversupply. Uralkali needs potash prices of at least $270-300 per tonne (depending on the location) for a mine to be economically viable - still cheaper than many of its rivals.

The fate of BHP Billiton's Jansen project, slated to be the world's largest potash mine, will be particularly significant. A $14bn investment into a giant potash field in Canada's Saskatchewan province will initially produce 4m tonnes a year when it comes online as soon as 2015, rising to a peak of 9m tonnes. Work on the mineshafts has already begun, but the project is still pending final approval by the company's shareholders.

Bottlenecks

Even if all these supply issues are resolved and global demand does continue to increase at the 3% a year it has grown over the last decade, Uralkali still has major infrastructure bottlenecks to overcome.

Currently, Uralkali ships much of its potash to China by train, and the other customers around the world are supplied out of the ports in St Petersburg. Usually the company sends about 150,000 tonnes a month by train to China, but at the moment it is operating at minimum capacity of "not more than 50,000 tonnes a month," says Baumgertner.

The trouble is the capacity of the supporting rail connections is not enough to cope with the company's own expansion plans, let alone manage to carry all of EuroChem's potash as well. Between them, the two companies will be moving about 27m tonnes of potash a year at peak production. Some serious investment has to go into expanding the railways and one of the unresolved question is: who is going pay for this? "Rail is a problem for us. We can increase the capacity to 14m tonnes by the end of 2014 and then further to 15m tonnes if Russian Railways [RZhD] modernises the infrastructure. After 2018, when the EuroChem mine comes online, then rail transport becomes a big problem for us. It means we have wait for a decision from RZD before we can make a decision on Polovodovsky or Ust-Yayvinsky," says Baumgertner.

Finally, the cartel agreement with Belarus also seems to be breaking down under the pressure of falling prices. The Chinese supply deals are done on the basis of long-term contracts, but trading with Southeast Asia and Brazil is based on spot prices. If all these greenfield projects come on stream, then the potash business will go a long way to being transformed into a commodity business.

The partners in the Belarusian Potash Company have already tried to shore up their relations and formed a new trading company called Soyuzkali that will be registered in Switzerland, but run out of Minsk. Soyuzkali is expected to take over the trading operations from the middle of next year. But trading relations have become strained, as Uralkali already has its own eponymous trader that Baumgertner says is purely a technical thing necessary to raise trade finance. However, the Belarusian side have accused Uralkali of using the trader to sell potash outside of the cartel agreement. Once more potash production comes onto the market after 2018, these cartel relations will be even harder to maintain.