Oligopoly - The Potash Cartel

World prices for potash - a vital ingredient in manufacturing fertilizer - are expected to fall sharply after a leading Russian producer of potash announced that it was leaving one of the two big cartels controlling the potash market.

Uralkali is pulling out of the Belarus Potash Corporation export cartel after it accused its Belarusian partner of violating an agreement and selling outside the partnership.

Potash, which is mined from deep underground, is expensive to produce and requires massive scale and huge new investment to bring on new mines. The potash industry has been dominated by two informal cartels: Belarusian Potash Company, representing Uralkali and Belaruskali, and Canpotex, the North American export cartel which includes PotashCorp, Mosaic and Agrium. With 70 per cent of the market under their control, the cartels cut production during times of weak demand, keeping prices from falling sharply.

The two potash cartels have maintained market prices well above marginal production costs by refraining from flooding the market. In 2008, when the world price for potash jumped 10-fold to almost $1,000 a tonne, the fertilizer industry attracted new businesses including mining companies such as BHP and other entrants piling in with development projects to unearth new supplies of potash. This has included projects to mine potash in North Yorkshire.

Many of the hugely expensive green-field projects under consideration rely on a potash price of $450 per tonne or more to deliver satisfactory rates of return on investment. A fragmentation of the cartel might mean that international potash prices could fall from about $400 to $300 per tonne after the change in strategy which could inflict economic losses on new entrants into the potash industry.

However a price drop would be good news for farmers as it should in theory lead to a reduction in the price of fertilizer. For example, fertilizer is 25 to 30 percent of the cost of grain production in the United States.

China, which has 20 per cent of the world's population but only 10 per cent of its arable land, has long been trying to bring potash prices down. China buys about 5m tonnes of potash a year and in 2012, China used monopsony power to obtain potash price discounts after staging a buyer's strike that lasted several months.