Taking the long view

The global potash market
March 01, 2015

A global overview of the potash market with a brief mention of developments in Ethiopia and the Republic of Congo – previously published in Cultivate (issue 2, November 2013)


 

The potash stats

Potash is a source of soluble potassium, primarily used as an agricultural fertiliser, and is retrieved through mining. There are various forms of potash, with different chemical properties. The two most common forms, muriate of potash (MOP) and sulphate of potash (SOP) which account for approximately 65Mt and 5.5Mt of annual global supply respectively, have different effects on the aesthetics of food, and so are used for different crops.

MOP is used for carbohydrate crops, which are eaten by animals or processed before consumption by humans, such as wheat, while SOP is used for fruit and vegetables.

Currently only 12 countries produce significant amounts of potash: Canada, the world’s largest potash producer and exporter, as well as Russia, Belarus, China, Germany, Israel, the US, Jordan, Chile, Brazil, the UK and Spain.

Projects are, at present, being developed to produce potash in other countries, including Ethiopia and the Republic of Congo (Congo).

Demand for potash comes largely from China (21%), Latin America (21%), the US (16%) and India (8%), for use in cultivating fruit and vegetables, corn, maize, rice, sugar crops, soybeans and wheat.

Demand for potash

A number of factors are seen to drive increased demand for potash in the long-term. We have a growing population requiring greater volumes of food production, an increasing focus on healthier and more varied diets, and an escalation in meat consumption, particularly in emerging markets.

The combination of these factors requires a greater production of grain for animal feed and increased fruit and vegetable cultivation in order to sustain a greater volume of food production. Potash is seen as essential to that growth.

The limited supply of arable land will also drive demand for potash, particularly given that biofuels – another high-growth area – compete directly with food production for land. The farming industry has to work within these constraints to increase food yields, to increase the nutritional value of food, and to build in greater drought resistance. This means using fertiliser, and in particular, potash.

However, recent developments in the market have raised questions regarding short- and medium-term potash prices, and analysts have been taking a closer look at the demand statistics.

The end of an era for potash mining

Despite its importance in agriculture and the size of the market, potash is not traded on any exchange. Until as recently as July 2013, two groups of companies, Belarusian Potash Company (BPC), an export sales joint venture between Belarus’ Belaruskali and Russia’s OAO Uralkali, and Canpotex Ltd, a similar venture between the three largest North American producers – Canada’s Potash Corporation of Saskatchewan Inc and Agrium Inc and the Mosaic Co – controlled about two-thirds of global production capacity.

These groups negotiated sales contracts, sometimes with entire countries, at a fixed price that would then become the global benchmark for months. Both these groups adjusted output to support market prices.

However, July 30, 2013 saw the public announcement of the break-up of BPC, a sudden move driven by the increasing dissatisfaction of both partners with the actions of the other. While Uralkali’s strategy was, previously, one of ‘price over volume’, following the break-up it became free to pursue a greater market share by agreeing lower prices and increasing output volumes.

This has caused serious concern among some investors over the future of potash prices and the consequences of a price war between the largest producers. According to reports, Uralkali itself suggested prices may fall by up to 25 per cent as competitors compete for market share.

And prices have fallen since Uralkali has been operating at full capacity since August 2013, although perhaps not quite as much as predicted. Now, less than four months after the break-up of BPC, Uralkali is anticipating a growth in global demand in 2014, fuelled by the lower prices.

The uncertainties facing Uralkali, its strategy and the global market for potash are far from over. Individuals who together hold 33 per cent of Uralkali have now announced an intention to dispose of part of their holding, and more recent announcements are that sales have been agreed, although the terms remain confidential.

The prevailing view is that these deals are an attempt by Uralkali to repair relationships following Belaruskali’s call for a change in ownership or strategy before a reconciliation would be possible. However, it is by no means clear whether BPC, or a new alliance between the parties, will be re-established, and if so, whether this will bring stability to potash prices – which fell to their lowest in three years late in 2013.

Enter new players

At the same time, entrants to the world of potash mining are seeking to take advantage of potash deposits in new areas.

Yancoal Canada, a subsidiary of the Chinese Yanzhou Coal Mining Company Ltd, has announced that it is pressing ahead with its plans to develop potash mines in Saskatchewan, where it spent US$260 million buying 19 potash exploration licences in 2011. Yancoal is taking a longer-term view, saying “the cartel break-up leaves more development opportunities and room for emerging potash enterprises”.

BHP Billiton has  confirmed that it will go ahead with the development of its Jansen project in Canada, albeit with a slower timetable.

Ethiopia: the Danakil Depression potash project

One of the junior miners is Allana Potash Corp, which is listed on the Toronto Stock Exchange and has recently filed an application for admission to London’s junior AIM market. Allana’s flagship asset is its potash project located in the Danakil Depression in north-eastern Ethiopia, for which it has mandated a number of development finance institutions and export credit agencies to arrange debt funding.

Ethiopian potash deposits in this region are well known and highly concentrated. The Danakil Depression is an atypically shallow potash reserve, making it comparatively easily accessible, and therefore less costly to extract. The hot and dry climate in the region is also ideal for solution mining, and Allana has negotiated arrangements with Djibouti port authorities and Ethiopian road authorities to provide the infrastructure needed to export its production.

Given the recent changes to the landscape of the potash market, potential off-takers and equity investors are becoming increasingly interested in Allana’s low-cost production potential.

Congo: the Mengo and Sintoukola potash projects

Magindustries Corp is progressing financing for construction and development of its Mengo Potash Project, a greenfield potash project in the Congo, with a proposed designated capacity of 1.2t/y. In November, the company received a letter of commitment for the majority of funding, around US$740 million, required to build the project.

Hong Kong-listed Dingyi Group Investment Ltd has announced an extension to the closing date of its offer to shareholders in Elemental Minerals Ltd, the advanced mining exploration and development company that has a 93% stake in the Sintoukola potash project in the Congo.

The fact that new entrants – such as Allana and Dingyi – are continuing to progress with their projects and are looking to take stakes in potash mining and production companies indicates that market players recognise the ‘compelling long-term fundamentals of the potash industry’, as recently outlined in The Financial Times.

Despite its importance in agriculture and the size of the market, potash is not traded on any exchange.

A mixed tale for the market

Despite the current uncertainties regarding the price of potash in the short and medium term and somewhat flat demand over recent years – in large part due to poor economic conditions post the financial crisis – the predominant view appears to be that global demand will continue to grow, even if at a somewhat modest rate.

Investors may be concerned about falls in the price of potash, but from a food security perspective, changes may bring benefits for farmers and consumers. A reprieve for farmers from the growing costs of production will assist them in supporting sustainable food supply, and cheaper production means cheaper food prices for consumers.

In addition, the break-up of BPC may ultimately lead to more market-orientated and transparent pricing for potash. Ultimately, if potash prices do fall, or at least remain at their current lower levels, as many predict, and populations continue to grow, we may well see increased demand, which will in turn lead to price increases in the longer term. This would bode well for all producers, especially those such as Allana that can reap the benefits of less expensive production in the interim.