While no one has a crystal ball, it is our opinion that potash prices will likely rise, but at a slow rate. It is no secret that the potash market is largely controlled by an oligopoly. This being said however, it is not a perfect oligopoly, there is “leakage” of approximately one-third due to producers outside of the oligopoly. These producers enjoy some of the benefits of the oligopoly, but to a degree function outside of this structure. Additionally there is a natural reluctance to higher prices within an oligopoly. The kinked demand curve of the oligopoly helps describe this reluctance of the upward rise in prices.
The kinked demand curve shows that there is an elastic demand at higher prices, yet an inelastic demand curve at lower prices. This curve is shown in figure 1.
Figure 1 Kinked Oligopoly Demand Curve
This curve indicates that there is a reluctance to raise prices as others can then step in and sell tonnage at the lower price, but little is gained by lowering prices due to the inelasticity of the demand curve. This is further exacerbated by those producers that operate outside of the cartels. If those in the oligopoly “agree” to raise prices, there is roughly a third of the production that producers must then make a decision whether to raise prices or to expand their market share by holding prices at the lower level. This decision is a bit of a balancing act for these producers at least to the point where they have consumed (sold) all of their production. Some will likely decide to raise prices while others may not decide to do so. A portion of this decision would likely involve where they are in terms of capacity, overall costs, and in terms of marginal costs.
Furthering this example, below is a simplified model that compares the current capacity, future capacity, and effective capacities, of those in the oligopoly, and those outside of the cartels. A snapshot of this model is shown in figure 2. This model makes some simplified assumptions on expansions, effective capacities, and market growth, but shows that in “early” years, there would not be as much ability to raise prices, as there would be in later years. This model is simplified, and certainly all losses to producers is not going to occur to oligopoly members, but will be distributed likely across all producers depending upon the structure of their costs of production. Additionally as the producers approach effective capacity (whatever that may actually be) the likelihood of expansions and greenfield projects increases, which would again put the model in flux, as well as the ability to alter the price of potash. This also does not address pricing issues such as increased agricultural commodity prices, loss of capacity due to facility issues (flooding, strike, etc.), or capacity issues as a result of things such as world turmoil (Russia, Ukraine, etc.). It should also be remembered, that North American portion of the oligopoly only applies to tonnage sold outside of North America, in North America there is a more “normal” supply and demand curve. This of course only applies to the point at which an arbitrage opportunity exists for those in the rest of the world to exploit.
Figure 2 Simplified Model of Potash Production and Market by Member Type
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