On June 26, the Potash Corporation of Saskatchewan (POT) revealed an $8-billion offer for Germany’s K+S AG (KPLUY).

The deal, if it happens, would be the first major deal in the potash sector since 2011.

The market for potash, a key fertilizer ingredient, has been in the doldrums since 2013. That’s when one of the two global potash cartels – the Belarusian Potash Company – broke up. Uralkali left, leaving only its partner Belaruskali.

That breakup led to falling potash prices, as competition between the global producers began to heat up. Although prices have since stabilized, they still hover near five-year lows.

The freer market and resulting prices didn’t please the North American Canpotex potash cartel, forcing it to operate well below capacity. This cartel is headed by Potash Corp. and also includes Mosaic (MOS) and Agrium (AGU).

This brings us to the proposed takeover of K+S by Potash Corp.

No Deal Logic

Many analysts have questioned the logic of Potash Corp.’s offer for K+S. After all, why would a low-cost producer want to buy one of the highest producers of potash?

On the surface, this deal makes no sense.

K+S’ production costs are around $230 per metric ton, thanks to its aging mines. Meanwhile, Potash Corp.’s costs are at only $95 per metric ton this year.

But dig a little deeper and the reason is obvious.

Potash Corp. is after the Legacy mine, owned by K+S, right next door to some of its mines in Saskatchewan.

Legacy Project

You see, K+S has sunk about $2.2 billion into Legacy, which is scheduled to come online in 2016. Legacy is similar in size to Potash Corp.’s current mines, with a capacity to eventually produce roughly three million metric tons of potash annually.

An important fact to note is that K+S has already said it would not join the Canpotex cartel. It would, like most producers globally, sell its output on the open market.

Analysts at the investment bank Liberum told the Financial Times that Legacy “poses a disruptive risk to industry pricing discipline.” One can almost see the panic in the Potash Corp. executive suite’s faces as more potash production is set to hit an already-weak market next year.

Despite denials from Potash Corp., if successful in its bid the company would likely shutter Legacy to keep prices higher than they otherwise would be.

Piles of Po

Even if Potash manages to grab hold of the Legacy mine, it doesn’t mean its troubles are over. You see, mining giant BHP Billiton (BHP) has an even bigger potash project in the works.

The Jansen project, also in Saskatchewan, will be a mega mine if BHP decides to go ahead with it. It would be the world’s largest potash mine, with a capacity of eight million metric tons annually.

And BHP has no interest whatsoever in joining the Canpotex cartel.

The only hope Potash Corp. has is that, in this age of retrenchment by the big miners, BHP decides to put the project on hold.

The bottom line here is that Potash Corp., with whatever maneuvers it tries to make, is working from a position of weakness, not strength. The market looks to be oversupplied for years to come.

And the chase continues,

Tim Maverick