Potash global review: tunnel vision

Glow of optimism: underground mining at PotashCorp.’s 4m. tpa Laningan mine in Saskatchewan, Canada.  Courtesy PotashCorp

Considering the present market challenges facing the potassium bearing mineral, its price should have plummeted in the last six months, as was the case for its phosphate rock, nitrates and sulphur counterparts. This has not happened.

Since Q3 2008 demand for potash has vanished. The world’s leading producer, Potash Corp. of Saskatchewan Inc. (PotashCorp) described its sales as “tailing off considerably”; German potash miner K+S Kali GmbH said demand had “come to a standstill” and that the market is “slow and depressed”; while The Mosaic Co – the world’s second largest producer – described demand as “soft” as the “market re-calibrates”.

While sulphur and phosphate rock prices crashed – and in some cases paying for it to be taken away – potash spot prices fell to the $550/tonne mark (see IM April ’09, p.39).

Potash’s value was salvaged by across the board cuts at the handful of the world’s major suppliers.

PotashCorp led the way by slashing 3.5m. tonnes (~30% of capacity), The Mosaic Co cut 2m. tpa (~20%), while Germany’s K+S Kali GmbH is intending to curtail 1.7m. tpa of its 8m. tpa capacity by mid-2009.

It appears an astonishing reversal of fortunes for potash from this time last year, when the industry was experiencing through-the-roof demand and producers were announcing a raft of expansions.

Despite this situation, there is a unique sense of optimism surrounding all those involved with potash. There is such a strong feeling that this rapid demand evaporation is short term (one year), that producers talk of the expansion plans with the same gusto as if demand were as positive as early-2008.

World potash production

Total: 61.2m. *The figures represent listed production capacity but a more accurate figure is expected to be in the 57-58m. tpa region. Source: Industry sources

PotashCorp.

The world’s leading potash producer, PotashCorp, will be the name familiar to most. The group, which operates six underground mines and one solution mine in Canada, has been used as the benchmark not only for the potash industry, but for the fertiliser sector as a whole and accounts for 20% of global production (see “Focus on Canada” panel).

In March 2008 PotashCorp announced its second round of production cuts with a 1.5m. tpa reduction taking its total to 3.5m. tpa over 25% of its capacity as demand slumped. The company, however, is leading the bullish mood among the industry.

Bill Johnson, director public affairs at PotashCorp told IM: “We’ve announced in Canada a $6.8 billion expansion plan which started in 2007 and runs to 2012, raising production from 10-18m. tonnes. We have not backed off on these expansion plans at all. This should tell you something about our demand expectations.”

PotashCorp has an iron grip on the industry, not only is it the leading supplier but it also owns stakes in the following producers: SQM SA, Chile (32%), Arab Potash Co., Jordan (28%), and Israeli Chemicals Ltd (11%).

Thus there has been talk in the industry of a takeover of the group by BHP Billiton Plc (see “BHP & PotashCorp –careless talk?” panel).

Mosaic: phosphate to potash

“We are already a bigger potash producer than most people realise and intend to grow [the potash business] to a greater share of our total volume in years to come”, outlined The Mosaic Co.’s president and chief executive officer, Jim Prokopanko. And he has a point.

While PotashCorp gains virtually all the mainstream media pages and is used as the barometer for the agricultural industry, Mosaic has a production ability that nearly matches the world’s bigger producer at 10m. tpa.

This perspective has come from Mosaic historically leaning towards phosphate production which at present represents 51% of it business to potash’s 49%. Prokopanko aims to get this ratio to 60:40 in potash’s favour.

Mosaic operates: the Esterhazy mine K1 and K2 (5.3m. tpa capacity) – which is part owned by PotashCorp – Colonsay (1.8m. tpa capacity), and a solution potash mine in Belle Plaine (2.8m. tpa capacity); all are located in south Saskatchewan (see “Focus on Canada” panel).

In announcing its sales results for its Q3 (December 2008 to March 2009), a clearer industry picture was given. Mosaic’s potash sales had slumped to 800,000 tonnes compared with 2.1m. tonnes a year earlier.

Like PotashCorp, Mosaic is expecting its potash production cuts to total 2m. tpa in this fiscal year which ends in May 2009.

Prokopanko described the present market situation as “soft” while the “crop nutrient market re-calibrates”

He said: “We’ve experienced a broad and sharp commodity sell-off, a global economic downturn and significant credit constraints, and a pipeline build of high cost inventories.”

“This has resulted in a lack of buyer interest, weak volume and declining prices, and heightened inventory valuation risk across the supply chain. In response to slower demand and rising inventory levels, numerous producers – including Mosaic – have reduced production,” added Prokopanko.

Agrium merger raises questions

A proposed merger between Canada’s third largest potash producer, Agrium Inc. and one of North America’s largest fertiliser groups, CF Industries Inc. has raised questions on the competitiveness of the agribusiness sector.

A $3,800m. offer by Agrium was rejected by CF at the end of March and described as “grossly inadequate”. Agrium has since turned to the shareholders at CF urging them not to re-elect the board, and at the time of press the situation remained unsolved.

Agrium is the most rounded fertiliser mineral producer in Canada with potash representing 26% of its business, nitrogen 29% and phosphates 17% (the remainder is retails and services). Unlike Canada’s other producers, Agrium is not expected to cut production and the company intends to expand by 3m. tpa over the next six years.

Mergers have dominated agribusiness over the last decade and concerns have been raised over the competitiveness of the sector.

The president of Canadian National Farmers Union, a body representing potash’s end users, Stewart Wells, explained: “These potash companies have been making these record profits and what it really looks like they’re up to is further carving up the available markets. It seems to us there should be a really thorough examination of the whole business with an eye to actually fostering real competition in the sector.”

Russia’s role

Russian potash production comes from JSC Uralkali (5.5m. tpa capacity) and OAO Silvinit (5.1m. tpa capacity) both of which sell the vast majority of their product to China.

Following the dire end to 2008, Uralkali’s potash output last year was 6.7% lower than 2007 at 4.8m. tpa potash. Silvinit is expected to have experienced a similar decline between 500,000-1m. tpa.

Uralkali’s latest sales figures show China as its main customer taking 40% of production, Brazil second with 21%, South East Asia 11%, Russia 10%, Europe 8%, India 7%, and others 2%.

Over recent years many have predicted Russia’s rise to dominance in the global potash industry, but this is yet to materialise.

Before the global economic crash caused a seismic shift in perspectives, it was strongly suggested that the two producers along with OAO Apatit would be subject to a government encouraged merger as Russia seeks to secure fertiliser minerals for its growing agricultural industry (see IM February 2009, p.15).

It is through future demand rather than supply of potash where Russia may play the most important role in the coming years.

The Russian government is seeking to reduce its reliance on imported food by boosting its own industry. Last year it was even suggested that the country may even discourage potash exports in order to retain the tonnages for domestic use.

The government also opened up the Verknekamskoe deposit tenements for auction last year. Silvinit paid $1,480m. for 3,500m. potash reserves over three sites, Verkhnekamsk Potassium Co. paid 708m. for a 1,000m. tonne potash deposit, and fertiliser group EuroChem paid $172.6m. for a third site containing 1,000m. tonnes (see IM April ’08, p.20: Russia’s golden potash future).

Bill Doyle, PotashCorp’s president and chief executive officer, said: “Russia’s agricultural industry is making a big comeback. Over the last 15 years the country has had an incredible reliance on food imports, particularly from Finland, with very little domestic produce on the shelves.”

Doyle explained that Russia has forgotten about the need for a “basic capability” to produce its own food.

This sentiment was echoed by K+S Kali’s global potash manager, Friedhelm Mester who told IM: “Russia has been a big producer of agricultural commodities in former times and we expect [these times to return to some extent]. The government in Russia is very much supporting the increase of agricultural production. We will see whether the mentioned targets can be reached.”

Producers are keeping one eye on Russia at present as its emergence as a significant market depends on the government’s backing of its agricultural industry. The more tangible markets are China, India, and South East Asia.

Belarus

Belaruskali is Europe’s leading producer of potash with an 8m. tpa production from Soligorsk over four mine sites and additional refinery complexes.

As is the trend in today’s potash industry, the company is expanding operations by 2m. tpa to 10m. tpa. Belaruskali is expected to open its new Krasno-slobodksy mine this year, and the Berezovsky mine within the next three years.

Belaruskali’s predominant market is Asia (40%), Latin America (21%), and Europe (42%). It also sells to North America (10%), CIS (5%), Africa (2%) and the Middle East (1%).

The company sells its product through agent, Belarusian Potash Co (BPC), in the same way Canada’s producers use Canpotex. Uralkali also sells it product through BPC.

Up until 2005 Belarusian potash sales were mediated by Moscow, a deal which the country claims cost they “substantial profits”. This changed when, in April 2005, BPC was established as a joint-venture between the Belarusian and Russian governments.

Vladimir Semashko, First Deputy Prime Minister of Belarus explained: “In less than three years Belarus has learnt to effectively sell its own strategic product - potash fertilisers. We’ve learnt not only to sell fertilisers but also dictate terms of the market.”

Germany

K+S AG, Europe’s leading potash producer, like its Canadian counterparts has announced cuts of up to 1.7m. tpa potash from its 8m. tpa capacity.

The German producer, which sources potash from subsidiary K+S Kali GmbH’s five underground potash mines, initially cut 400,000 tpa potash at the end of last year and recently announced its intention to shed a further 1.3m. tpa gradually until mid-2009.

Norbert Steiner, chairman to the board at directors at K+S, said: “There was a reduction in potash production of 10% in 2008... Trade at present is sitting on relatively high stocks. Our deliveries of potash depend on the stock holding warehouses and they are still full.”

Peter Rummel, K+S’ European potash manager told IM: “The market is slow and depressed because of the low prices the farmers are receiving for their goods.

K+S is also the target of EuroChem MCC OJSC, one of Russia’s largest fertiliser groups, which last month revealed that it may increase its 15.001% stake in the company.

As uncertainty surrounds the future of Russian potash exports investing in sources outside of the country appears a sensible strategy.

Israel Chemical Ltd

Israel Chemicals Ltd (ICL) through ICL Fertilisers extracts potash from Dead Sea brine resources in Israel and underground rock mines in Derby, UK (Cleveland Potash Ltd), and Spain (Iberpotash). In 2008 ICL operates at capacity producing 5m. tpa, equating to 9% of world production.

Potash sales accounted for 64% of ICL Fertiliser sales; ICL Fertiliser represents 48% of ICL’s business.

ICL is increasing its Dead Sea brine capacity by 500,000 tpa (to 5.5m. tpa) over two years, and upping output in the UK and Spain by 300,000 tpa through processing equipment investments.

Despite experiencing a slowdown in business, ICL has not yet reported any production cuts.

Elsewhere

In 2008 Vale produced 607,000 tpa potash (from a 850,000 tpa capacity) from its underground Taquari-Vassouras mine, located in near Rosario do Catete in Sergipe state, Brazil. This was 64,000 tpa less than 2007.

Owing to the demand slump the company stopped potash production in November 2008 for a month which resulted in the lower figures. 2009 is expected to show a further decline.

SQM SA operates a 550,000 tpa brine potash mine in the Salar de Atacama, Chile and the second leading potash producer in South America. When IM visited SQM’s operations in January, the company was not operating at capacity.

The USA’s sole producer is Intrepid Potash which has a capacity just shy of 900,000 tpa from mines in Utah and New Mexico.

Iran has recently made a $98m. foray into the potash market by establishing a 50,000 tpa brine production through Iran Potash Co. Production is based in central Kavir near Khor city (see IM June ’09 for a review of Iran Potash Co.’s activities).

Emerging producers

It is difficult to pick out the serious contenders from the pretenders in the emerging potash producing community. Potash’s rise to fortune put the expensive start-up cost of between $1,500m.-2,000m. for an underground mine into perspective and has attracted a number of new companies.

The accompanying table on the previous page highlights emerging global production.

Is potash needed?

Despite being the only natural or synthetic source of the potassium – one of the key three agricultural nutrients in addition to nitrogen, and phosphorous – many believe potash application is not deemed necessary.

Potash has a higher residence time in the soil which can mean its application is not required as frequently as that of nitrogen or phosphates.

On this Bill Johnson of PotashCorp explained to IM: “It is true that potash can build up some credits in the soil. Some farmers are running the numbers on whether to use potash and trying to figure out the right mix, but we believe yields increase significantly [with potash’s application].”

Johnson’s last point on yields is not refuted. The challenge however is persuading or educating developing economies that investing in higher priced potash fertiliser will return larger yields – a risk many are not willing to take.

Norbert Steiner, chairman to the board of directors at K+S, said: “Small scale farmers [particularly in Africa and Asia] learn from their grandfathers that they can avoid fertiliser application... but a decision on quantity and quality has to be made.”

Potash trade routes

Market upturn, but when?

It would be fair to assume that potash’s necessity in agricultural and food production for the growing world population would secure a very bright future for potash. But PotashCorp, at least, is not taking anything for granted.

On this sentiment, Johnson explained: “It is not as simple as that. Who would have thought that our banks [USA and UK] would be nationalised by their respective governments. There are other outside factors weighing on the market.”

German producer K+S expects its Q1 2009 potash fertiliser sales to be “much reduced”, however it expects to begin to see shoots of recovery as early as the end of Q2 2009.

K+S’ global potash manager, Friedhelm Mester, explained to IM: “We expect a certain recovery for the second quarter of the year. In many regions of the world this is also the start of the fertiliser season. For the second half of 2009 we expect a situation close to normal.”

On the medium (five years) to longer term (ten years) Mester said: “The growing world population, resulting in higher demand for agricultural commodities, will also lead to a higher application of fertilisers.”

“Because of limited arable land availability, an increase in crop production only can be reached by harvesting higher yields from the land. The application of fertilisers is the most effective way increasing yields per hectare. Furthermore, the future prospects for potash will be above average. One answer to the question “how do you increase yields?” is balanced fertilisation. In some of the crop growing regions this balance has not been reached yet.”

PotashCorp believes the downturn will last longer. Johnson explained: “2008 was a fantastic year for us with sales tailing off at the end. We expect 2009 to be a mirror image of this, starting slow with sales eventually picking up”.

“Humanity’s greatest challenge”

Nothing in life is guaranteed, particularly in today’s global state of affairs, but the need for food strikes at the very core of human existence. The most significant fact is that the global population is on course to rise from 6,900m. today to over 8,300m. in the next 15 years.

The population is the central reason why the world’s potash producers are scrambling to expand capacity, even at this time of very low demand. Norman Borlaug, Nobel Peace Prize winner for bringing food self sufficiency to Saudi Arabia, summed up the challenge: “The world will [house] two billion more people than it can sustain and I don’t see two billion volunteers. It’s just that simple.”

The other major factor is the world’s changing diets. As economies such as China and countries in South East Asia emerge, diets are shifting from pulse and rice based to protein (meat and diary based increasing the need for grain feed), fruit and vegetable based.

For example, in China between 1990 and 2005 cereal consumption fell by 20% while the following increases occurred: meat by 130%, oilseeds by 140%, vegetables by 190%, milk by 200%, and fruit by 250%.

The other two factors that will play a major part in securing potash’s future are:

• Land: availability of arable land is diminishing while over-farming of existing land damages present capacity. The Amazon Basin, Brazil and the Urals, Russia are the last remaining great expanses of arable land.
• Biofuels: ethanol and biodiesel production has increased significantly as oil reserves diminish. Biofuel is one of the favoured technologies to reduce the world’s dependency on oil-powered cars, but it is land intensive. Despite talk of the moral issues here (food versus biofuel), potash will be needed to make the most of the land either way.

Luc Maene, director general of the International Fertilizer Industry Association, summed up the seriousness of the issue: “The fertiliser sector will be at the heart of humanity’s greatest challenges over the 21^st century... [in this light] food production and security of supply will be central to many government agendas in the future.”

There is an old adage which says: Nothing in life is certain but death and taxes. Perhaps more fittingly for the 21^st century and future demand for potash should be added to the list.

But at a cost of $2,000m. for each new underground potash mine, the question is: how many companies will want to take the plunge?

Footnotes:
Focus on Canada

Canada is the world leading potash producing country with production supplied by three producers: Potash Corp. of Saskatchewan Inc., The Mosaic Co., and Agrium Inc.  All of these producers sell their product through the marketing agent Canpotex International PTE Ltd which sells to Chinese, Indian, South East Asian, and South American markets.

The three producers operate eleven mines between them, ten of which are located in the central province of Saskatchewan – the exception is PotashCorp’s New Brunswick mine in the east of Canada.

PotashCorp dominates production operating seven of Canada’s potash mines with a capacity output of 11-12m. tpa which it is presently extending to 18m. tpa. Mosaic is second with a 10m. tpa capacity from its three mines, and Agrium third with 1.8m. tpa production from its Vanscoy operation.

All producers in Canada have embarked on medium to long term expansion plans with PotashCorp raising its production to 18m. tpa over the next five years, Mosaic by the same amount in 11 years, and a possible Agrium expansion by 3m. tpa in six years.

*restart date

BHP/PotashCorp – “careless talk”?

The latest rumour to involve BHP Billiton, the world’s largest mining company, is a takeover move for the world’s largest potash producer, PotashCorp. Despite the origins of this rumour being described as “careless talk” with little foundation, it does raise some intriguing talking points.

Since BHP’s failed Rio Tinto Plc bid, the group has been paired with a raft of mining companies in every possible scenario: flagging miners, miners showing strength through the recession, struggling miners with future promise... the list goes on.

But there is one good reason why, since originating, the BHP/PotashCorp rumour has circulated through analyst and banking circles faster than potash’s rise to fortune: it is because it appears to make complete sense and follows the new global economic mantra of sustainable, sensible investments.

Last year BHP Billiton made a concerted effort to be seen to be diversifying into the fertiliser minerals market. In May 2008, the group purchased its first potash asset, Canadian junior miner, Anglo Potash Ltd, for $284m. This was swiftly followed by BHP chief, Marius Kloppers, publically asserting the company’s fertiliser minerals plan.

“We have an absolutely world class potash resource in Canada” explained Kloppers in June 2008, “which is based on the view that agricultural commodities will go the same way as metals orientated minerals.”

As if BHP’s intentions were not clear enough, at the end of 2008 it submitted a 239-page proposal to the Saskatchewan Ministry of Environment, Canada, for its Jansen Potash Project which, if given the green light, would be the world’s largest potash mine in 2016 with a 8m. tpa output capacity.

This is significantly larger than the world’s largest mine at present, the 5.3m. tpa Esterhazy mine in Saskatchewan, Canada owned PotashCorp. and mined by Mosaic.

IM contacted both PotashCorp and BHP on this issue with both companies responding with the expected “no comment”, not wishing to fuel any rumours.

Some quarters believe that PotashCorp would be too big for BHP, especially with credit supply drying up, and see The Mosaic Co. – which has changed ownership three times in recent years – and Agrium Inc. more manageable and realistic targets.

As the world’s markets crashed it was thought by some that the end of potash heyday had come, and the interest it had conjured in 2008 would evaporate as quickly as it arrived. This has not happened.

As investors and mining companies saw the metals markets crash around their feet, the spotlight has turned onto fertiliser minerals which is the closest market to metals in terms of volume and value.

Certainly, if BHP wants to get serious in the fertiliser business, then buying PotashCorp in a multi-billion-dollar coup will be the ultimate statement of intent.

Potash pricing

Potash pricing has held firm despite the dire market demand experienced over the last six months as producers scrambled to cut production and steady prices.  

Contract prices in 2008 rose to a record breaking $800/tonne, while two years earlier the same product was around $180/tonne.  Spot prices threatened to crash through the $1000/tonne barrier, but this never materialised.

K+S presently values its muriate of potash at €600/tonne for FOB Europe while Belarusian Potash Co.’s $750/tonne CFR sale to Brazil has recently got the industry’s attention.