Societe Generale bullish on potash until 2017

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Published: Wednesday, 29 October 2014

High barriers to entry the potash market for new mines; BHP's indecision over development of Jansen project continues; growth in potash demand expected in Asia

By Wayne Yamada

The global potash market is expected to remain bullish until 2017 due to high barriers to entry for new miners and the ability of existing producers to control supply, the findings of a new report by French investment bank Societe Generale (SocGen) state.

The bank forecast that potash prices will rise until 2017, with Brazilian prices increasing by around 13% from current levels while Chinese prices will increase by 15% and European prices will climb by 11%.

“We reiterate our more bullish than consensus outlook for the potash sector,” SocGen said.

“We believe the consensus is too bearish, due to expected supply additions in the medium to longer term,” the bank added.

High profits in 2007-2008 and 2010-2011 led many potash producers to pursue expansion projects, but few are likely to start producing significant volumes for another three years, which should keep potash prices buoyant.

Beyond 2017, the Southeast Asian nation of Laos could become a significant producer of potash, SocGen noted.

Laos’s potash capacity is likely to increase from a current 650,000 tpa to around 5m tpa over the next decade, due to Chinese investment in the country’s mining industry.

The Laos government banned some mining projects in 2012 due to environmental issues, but has since reviewed projects in 2014, including iron ore, copper, and potash developments.

While there is still considered to be significant risk of causing damage to the environment by mining potash in Laos, the backing of Chinese investors may override government concerns.

SocGen also expects projects in other parts of the world to come online from 2016. German fertiliser company K+S AG is slated to bring a 2m tpa potash project online in Saskatchewan, Canada, in 2017.

Russian potash producer EuroChem won bids to develop potash mines in the Verkhnekamskoe deposit in Russia’s Perm region in June this year, while TSX-V listed Allana Potash is developing the Danakil project in Ethiopia.

Other potash projects include Mag Industries’ Mengo development in the Republic of Congo, IC Potash’s Ochoa project in New Mexico, US, and Vale’s Sergipe potash project in Brazil.

Jansen delay

Meanwhile, BHP Billiton’s 10m tpa Jansen potash project in Saskatchewan, Canada, is not expected to be commissioned until 2025, due to the company’s indecision about whether to continue developing the mine.

Concerns over Jansen include the cost of development, which was estimated at $15-$16bn, at a time when the company is under pressure to cut spending and divest non-core assets.

“We believe it will take another three years to complete the excavation work [at Jansen] and then a further three years to start production. Thereafter, we assume another three to five years of capacity ramp-up,” SocGen commented.

“This suggests the Jansen project should not be fully operational until 2025, a good ten to 11 years from now,” it added.

BHP has already reduced spending on the project and has said that it does not expect Jansen to start production until at least 2020.

“Learning these dynamics, BHP is now waiting for a recovery in potash demand while looking beyond this decade to bring its mega project into operation. Highly leveraged new entrants would need at least $400/tonne of potash prices just to service their debt costs,” the bank said.

Idled capacity at PotashCorp

Canada’s Potash Corp of Saskatchewan (PotashCorp) also has the option to increase production, but has intentionally idled capacity of around 5m tpa in view of current uncertain pricing and demand conditions.

The company’s nameplate production capacity is around 18.1m tpa, but PotashCorp has said it will be operating at 12.5m tpa until 2016.

However, PotashCorp may not be able to produce at full capacity, even after 2020, due to concerns about oversupplying the market.

“We will have to see how PotashCorp responds to various new capacities which will start production from 2016-2017 onwards. As the industry leader, PotashCorp has so far maintained discipline and we can expect the same behaviour in the coming years as well,” SocGen said.

Growing demand

Overall, global demand for potash-based fertilisers continues to increase. SocGen predicts growth in Asia, due to the continent’s growing national populations, and Brazil, where the soil is deficient in potash.

Brazil is the world’s largest corn exporter and potash demand is expected to reach over 10m tonnes by 2018, compared with just over 8m tonnes in 2012.

China’s potash consumption has grown around 5% per year since 2000, primarily driven by growth in domestic fruit and vegetable acreage. Potash consumption was forecast to reach around 12m tpa by 2016, doubling levels seen in 2002.

In India, rice and wheat drives potash demand, with potash consumption set to hit 5m tonnes by 2019, compared to under 3m tonnes in 2013.