Bullish Uralkali set sights on potash number one spot

By Jack Elliott
Published: Tuesday, 28 August 2012

Difficulties in China and India have not deterred ambitious expansion plans to capture global potash production market Jack Elliot

Potassium is the seventh-most abundant element in the earth’s crust, and most of the world’s potash resources are amenable to low-cost mining and beneficiation - owing to their high-yield grades and large-tonnage ore bodies.

 


But Russia’s Uralkali has vast growth plans for the coming years and has set its sights on moving from the world’s second-largest potash producer to the number one spot.

Uralkali hopes to produce 19m tpa potash by 2021 - increasing its current capacity by some 80% during the coming 10 years. If successful, this expansion will firmly establish the company as the world’s largest potash producer.

But such ambitions may well be thwarted by the uncertain global economy. The European debt crisis, the slowdown in China and the devaluation of the Indian rupee combined to darken what was a very bright picture for fertiliser producers at the start of 2012.

The new year saw Uralkali suffering as China stockpiled its inventories, while negotiations with Indian buyers hit difficulties over price. The Russian producer was forced to cut its production to 60% for a period in Q1 2012, a bad omen for a company looking to near double its capacity.

However, business has recently stabilised, as the company told IM in Moscow.

“As of May, the company returned to full production The reason is that both Chinese and Indian markets and contracts have returned. Demand in China fell in Q1 2012 as the country stockpiled late last year, expecting prices to continue their rapid rise,” it said.





The expansion plan - a closer look

Uralkali’s audacious expansion plan is multifaceted, requiring significant investment at many of both the company’s greenfield and brownfield operations.

Uralkali owns two greenfield licences in Berezniki and Solikamsk, adjacent to its five potash mines, and seven processing plants in the Ural mountains of the Perm region. The company’s total JORC-compliant resource is 8.7bn tonnes of potash ore, including 4.4bn tonnes from the greenfield Ust-Yayvinsky and Polovodovsky blocks combined.

The Berezniki-2 plant and mine and the Berezniki-3 plant produce granular potash, while the Berezniki-4 plant and mine produce standard potash.

Capacity increases yielded from brownfield projects include 1.5m tonnes of additional capacity at Berezniki 4, while increased efficiency and debottlenecking at Berezniki-2 and 3, in addition to Solikamsk-2 and -3, will add 1m tonnes in total. A two-phase expansion programme at Solikamsk-3 will add a further 2m tonnes capacity.

The company plans to develop its two greenfield licences in Berezniki and Solikamsk - adjacent to its existing operations - which should bring an additional 5.3m tonnes capacity.

Uralkali puts total Capex investment for the expansion at $5.8bn. $0.3bn was invested in 2011, while $1.2bn will be invested in 2012-2014, $2.3bn between 2015-2017, and $1.9bn between 2018-2021.

Debottlenecking

The company will begin its debottlenecking plans in 2013. This project will encompass Berezniki-2, Berezniki-3, Solikamsk-2 and Solikamsk-3. It aims to increase the extraction of potash from the sylvine ore, while increasing the load on the existing technological sections by between 15-25%, the company said.

Increasing efficiency is key here, which the company will achieve through modernisation. Existing equipment, including mills, vacuum filters, flotation machines and thickeners, will be updated and partially substituted with more high-tech models.

The debottlenecking process, plus planned increases in efficiency, will raise the company’s total production capacity by 1m tonnes by 2017. The break-even potash price to justify debottlenecking will be $130/tonne.

Greenfield expansion: Ust-Yayvinsky

IM
saw Uralkali’s greenfield Ust-Yayvinsky construction site on a visit to Russia in June. The field - based on a JORC estimate as of 1 January 2012 - has a resource of 1.3bn tonnes ore and a projected capacity of 2.8m tpa capacity in 2020.

This project is being developed to offset the decreasing ore reserves at the company’s Berezniki-2 mine, which will be depleted in 2025.

Ore from the Ust-Yayvinsky project will be processed at the company’s Berezniki-3 plant, where capacity will be expanded, enabling it to process 2.8m tonnes of ore, up from 2.2m.

During the site visit, it was suggested that given the Ust-Yayvinsky field’s early stage of development, the company’s 2020 target might be over ambitious. The company explained that that weather conditions could play a factor in the site’s development.

“The shafts are to be drilled by December 2016, but this is not taking into account weather conditions,” a spokesperson told IM. “It’s not like Africa, where you have a season of heat, and then a season of rain.”

“The mine will be launched in 2020. It will have a life of mine of approximately 50 years, based on reserves of 1.13bn tonnes ore,” the spokesperson added.

“The schedule of project capacity achievement will be confirmed in the course of the project realisation,” the company said.

The break-even potash price to justify the Ust-Yayvinsky expansion will be $302/tonne, significantly higher than that required for the Brezeniki-4 debottlenecking and Solikamsk-3 expansions.





Greenfield expansion: Polovodovsky

Construction for the Polovodovsky greenfield expansion, the final phase of the company’s expansion plan, will involve the construction of a new two-shaft mine and processing site, yielding a capacity of 11m tpa.

Production is targeted for 2021, with a project capacity for the new mine and processing plant set at 2.5m tpa KCI.

The break-even potash price to justify the Polovodovsky project will need to be at $327/tonne, the highest of any of the company’s expansions.

Solikamsk-3 expansion

The Solikamsk-3 expansion, forecast to add an additional 2.3m tonnes capacity and scheduled to take place between 2015-2017, will be in two phases.

A ventilation shaft (shaft four) will be installed, along with one hoist machine. Shaft four previously reached a depth of 356 metres during the Soviet era, but now the company intends to further develop it to a depth of 481 metres. The construction will include a pit-bottom paddock, as well as the installation of a system of conveyers in the mine and on the surface.

Phase two of the expansion will involve the launch of a second hoist machine and the main ventilation unit, as well as an expansion of ore-treatment capacities. The project will also include the construction of a granulation unit, with a capacity of 2m tpa, the company said.

The break-even potash price to justify phase one of the Solikamsk-3 expansion will be $110/tonne, and $192/tonne for phase two.





Market must hold strong

To be economically justifiable, Uralkali’s average potash price will have to remain above $240/tonne in the coming years. While substantially lower than current selling prices - Uralkali settled its Q2 2012 contract with China at CFR $470/tonne - the market remains unpredictable, with 2012 in particular experiencing a bumpy start.

Vladislav Baumgertner, Uralkali CEO, forecast last December that the company would produce 11.8m tonnes in 2012. With sufficient capacity, this potential was set to be realised, but falling fertiliser prices saw the company revise its forecast to 10.5-11m tonnes.

This figure was further revised, with Baumgertner earmarking the production of just 10m tonnes for 2012.

Baumgertner does not expect demand to pick up considerably in the coming years, explaining that the company does not see considerable growth in the potash market in 2012 and 2013, as customers are reluctant to accumulate considerable inventories, he told IM.

The production revisions seem out of line with a company looking to nearly double ouput in the coming years, but they do not in themselves tell the full story.

India delays

One of the greatest issues Uralkali has faced in recent months has been contract negotiations with Indian buyers, with the latter threatening last year to stop all potash exports if producers refused to cut prices.

Uralkali, though, insisted that prices could not be cut.

“We cannot offer discounts for individual markets while global demand is high and our plants are working at full capacity,” Baumgertner said last November.

The delayed contract negotiations ultimately played a significant part in the reduced production in Q1 this year.

“Our strategy in India is to keep customers on an annual basis. Technically, it is difficult to move to a quarterly basis,” Baumgertner told IM in June.

“India is the only market that has underperformed this year: the country will not be able to return to its maximum level of consumption,” he added.

The company is still delivering to Indian markets, Baumgertner said at the time, adding that the company expected new negotiations to be discussed in July, with contracts signed in August.

Price forecasts

Uralkali was quite bullish on prices this January, and did not expect them to slip in 2012.

“Soft commodity prices are at very healthy levels,” it said. “Farmers earn very good margins, they can actually afford to pay more.”

In June, though, the company announced that it would reduce its domestic potash prices for Q3 2012 for Russian compound fertiliser (nitrogen-phosphorus-potassium, NPK) producers and industrial consumers.

Potash prices for Russian NPK producers will be Russian rouble (R) 8,662/tonne without discount ($271.66/tonne) during Q3, down from R9,318/tonne ($292.20/tonne) in Q2, and R9,768/tonne ($306.23) in Q1.

Potash prices for industrial producers will be R9,468/tonne ($296.82/tonne) at 95% KCl and R9,768/ tonne ($306.16/tonne) at 98% KCl.

This is a fall from 10,214/tonne ($320.48/tonne) and R10,514 respectively during the previous quarter. Prices were at R10,528/ tonne ($330.33/tonne) and R10,828/tonne ($339.79/tonne) in Q1 2012.

“The decrease in the price for NPK producers and industrial customers is mostly driven by the decreasing dollar exchange rate,” the company said.

These were in line with Baumgertner’s forecasts. He explained in June that he did not expect “any material price increases this year”.

Cools on UK-listing

Uralkali has been long-tipped to list on the London Stock Exchange, with the company saying last October that it would consider a listing in order to banish concerns about its standards of corporate governance.

However, in June, Baumgertner suggested that this is not likely to happen at least before the end of the year.

Demand forecasts strong

Despite negations complications with Indian buyers, and the late stockpiling of inventories in China last year, global agricultural fundamentals strengthened in Q1 2012 and demand is projected to remain robust, driven by a long-term favourable market outlook. Uralkali estimates that potash demand will continue its rise of about 3% per year.

In a recent report - Medium-Term Fertilizer Outlook 2012-2016 - the International Fertilizer Industry Association (IFA) anticipated that global fertiliser demand will increase by 2.8% in 2011/12 and by another 2.5% to 181.4m tonnes nutrients (NPK) in 2012/13.

By 2016/17, it is expected to reach 193m tonnes, corresponding to a compound annual growth rate of 2.1% over the average of the 2009/10 to 2011/12 campaigns.

“When compared to 2007/08 - the last campaign before the economic downturn - world fertiliser demand is anticipated to have fully recovered by 2012/13, including for potash,” the IFA said.

However, the IFA suggested in its forecasts that a surplus in potash production is not inconceivable. The association expects that world capacity may increase by 42%, while demand expands by 14%.

“A potential imbalance of close to 16m tonnes K2O may emerge in 2016, assuming all planned projects are completed on schedule,” the IFA forecast.

If this is the case, Uralkali will have to set itself apart by not simply plugging a gap in demand, but by offering a higher-quality product at a competitive price. Something which, given its long-established part of Russia’s mining history, strong customer base and large resource, it should be well able to do.