EDITOR: | August 1st, 2013 | 5 Comments

The day the potash sector changed (and probably for the better)

| August 01, 2013 | 5 Comments
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Cost control is going to rule more than ever in the potash industry. That is one apparent knock-on effect of Uralkali pulling out of the cartel it shared with Belarus (and which sent shock waves through the industry this week).

My colleague here at Investor Intel, Alessandro Bruno, is right to say that there is no need to panic. After all, the global market is expected to expand by 5% this year to 56 million tonnes. It is just that Uralkali’s move is likely to dilute the bargaining power of the existing market leaders; and that means lower prices. The Financial Times is talking about $300/tonne: that won’t matter to Uralkali whose cash costs are under $100/tonne, but it will to Germany’s K+S with a cash cost of $265/tonne (and then you have to add in the additional costs of running the company).

No wonder K+S shares fell. As one London analyst put it, “this is as if Saudi Arabia left OPEC. For the potash sector, this is huge”.

Yes, it probably is. What it seems (at least to me) to mean is that the new emerging producers, some of which are associated with this site, need to have less to fear in the future from the cartels. It may seem that, initially, the news is bad because of the threat to prices. But, longer term (and apart from the world’s growing need for potash), the Uralkali move will weaken the power of the large market dominators; this will apply particularly where mines are established close to the market, such as East Africa (Ethiopia and Eritrea for India) or Brazil. As the United States is a potash importer, new mines there will also be close to a ready market.

Smaller, nimble producers should benefit (and be juicy takeover targets, perhaps).

But there was another item of news this week that also goes to the global potash balance-of-power story: as was posted here on Investor Intel, Reuters reported that Russia’s Eurochem plans to set up a joint venture with Chinese fertilizer maker Migao Corp to expand its presence in the region. The venture is expected to produce up to 60,000 tonnes of potassium nitrate and up to 200,000 tonnes of chloride-free NPK fertilizers a year, Eurochem said in a statement. The companies plan to begin the construction of a plant in 2013 and launch production in 2014, Eurochem said without providing financial details of the partnership.

The formal announcement put it thus: “Migao Corporation (TSX:MGO), a China-based specialty potash fertilizer producer, today announced plans to create a joint venture with EuroChem, Russia’s largest mineral fertilizer producer and a top ten agrochemical company globally, to produce up to 60,000 tonnes of potassium nitrate and up to 200,000 tonnes of chloride-free NPK fertilizers in Yunnan, a province in southern China. EuroChem and Migao Corporation plan to begin the construction of a plant in 2013 and launch production in 2014.” (Again, here’s a project located in the target market area.)

Those who have been following EuroChem will recall that just over two months ago the Russian company confirmed it was going to develop two mines, one near Perm in the Urals (it is contiguous to Uralkali’s ground) and the other south of Volgograd. It plans to add 8.3 million tonnes a year to world supply and earlier this year vowed that it was carrying on regardless with development even though the North American producers were shuttering some capacity.

Meanwhile, in Australia investors took fright at the Uralkali news. While much of the media coverage in Australia has involved BHP Billiton and its Saskatchewan project, investors here marked down all the smaller potash shares significantly.

The news hit just as the stock exchange in Sydney opened on Wednesday. The day ended with Highfield Resources (ASX:HFR) closing down 20% at 48c. Potash West (ASX:PWN) also lost 20% of its market value, ending at 14c. South Boulder Mines (ASX:STB) was off 16.67% and Elemental Minerals (ASX:ELM) closed 12% lower, its fall no doubt cushioned by the fact that Chinese interests are working through a takeover for the company’s Congo potash project. Reward Minerals (ASX:RWD) dropped 18.37%; it had lost 10.9% the preceding day after announcing a capital raising. Potash Minerals (ASX:POK) suffered least, losing 10% on its share price.

However, the stocks steadied on Thursday. This would have been helped by the realisation that potash is still a strong story.

Indeed, the day before the Uralkali bombshell saw The Australian newspaper run a large profile of Highfield Resources which has projects in Spain. It pointed out that, while Jansen would add another eight million tonnes a year to world supply, Highfield is aiming to be a niche producer with around 400,000 tonnes a year: it has three projects in Spain, Javier, Pintano and Sierra del Perdon, the last mentioned containing two former operating potash mines.


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Comments

  • Tracy Weslosky

    Good commentary on the real impact to the potash market. I had lunch with Alessandro and I agree with him that some of the juniors like ICP will be unaffected by the news with their timeline to low cost production of SOP, and/or AAA’s MOP…even if the analysts that work for investment banks seem like they are indeed — panicking.

    August 1, 2013 - 3:37 PM

  • J. Best

    Sounds like short term pain long term gain, let’s hope that’s the case. Will be very interesting to see what happens here but long term demand should have no where to go but up with the population growth forecasts. Really good article Robin.

    August 1, 2013 - 4:32 PM

  • Alessandro

    I appreciate your reference to my article from a few days ago. Ultimately, the cartel duopoly was actually strangling prices, keeping them at USD 400/ton to discouarge mining giants like Vale SA and BHP from joining the potash game. While, prices may fall (and maybe not even by much) in the very short term, the demise of BPC and resulting weakness of Canpotex will allow market forces to take over. Those who have the best product and lowest OPEX will succeed. Besides, Uralkali’s focus is China, which is growing but which is not the only one to be doing so. South East Asia, India, Brazil and Africa (and of course all the others) need potash.

    August 1, 2013 - 5:11 PM

  • Ty Dinwoodie

    Excellent article, Robin. Potash is – and will always be – a strong story, especially in the long term. Regarding SOP, one has to understand that the SOP market dynamics are completely different and not dependent on the dominant MOP market. Mining analyst Kiril Mungerman of Industrial Alliance Securities stated that the Uralkali news could possibly reduce SOP pricing from $600 a tonne to $500 a tonne, which would still be a “healthy profit margin” if companies, like ICP, produce at an expected cost per tonne of $150 to $250. ICP’s enormous competitive advantage is that the company intends on becoming the lowest-cost SOP producer ($162 per tonne). I agree with Tracy and Alessandro that some of the juniors like ICP and/or AAA will be unaffected by the recent news.

    August 1, 2013 - 5:11 PM

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