When the Uralkali dust settles, we’ll get back to potash fundamentals
Uralkali’s dramas have certainly preoccupied the whole potash space — but perhaps we have let our attention wander a little from the other aspect of this sector: the market fundamentals. Like every extra tonne of poultry grown for the market requiring another 2 tonnes of grain. And all this at a time when the world population keeps climbing inexorably (some projections have poor old planet Earth needing to sustain 40% additional people by 2050) and the global area of arable land keeps on shrinking.
That’s not to say that the stoush between Uralkali and Belarus, caused by the former pulling out of their cosy cartel arrangement, is not astonishing to watch. Yesterday The Financial Times said the story would be a great plot basis for an Ian Fleming novel. Just consider the elements says the paper‘s Lex columnist: one party wrecks a lucrative cartel, the chief executive is arrested on his way to meet the Belarus prime minister, the Russian oligarchs come under pressure to sell their stakes, and now here’s China — exchanging its Uralkali bonds for a 12.5% equity stake. “Is its play political, economic, or both?” asks the newspaper. The item ends with a sentence that sums it all up: “No word yet on when James Bond arrives in Minsk”.
And this morning we hear of another twist in this fantastic story: the same newspaper reports that the billionaire owner of the Brooklyn Nets basketball team, Mikhail Prokhorov, and two Asian groups are now joining the list of potential bidders for stakes in Uralkali. An Asian sovereign wealth fund and an Asian industrial group had each expressed an interest in buying between 10% and 15% of the Russian company. The Financial Times names the other potential Russian bidders circling Uralkali: they are Dmitry Kogan, a former Russian government official said to be close to the chairman of oil giant Rosneft, billionaire (and former judo partner of Vladimir Putin) Arkady Rotenberg, and two other billionaires, Vladimir Evtushenkov and Mikhail Gutseriev. The judo angle takes us straight back to Ian Fleming, doesn’t it?
But let us also keep in the forefront the real drivers of the potash business.
Since the 2008 financial crisis hit, farmers around the world have “mined” nutrients from the soil. Now they have to put them back if crop yields are to be maintained. The world population is growing, developing countries are seeing diets improve as people can afford better food (China’s meat consumption has tripled since 1990) but the amount of arable land is shrinking due to urbanisation and other factors.
Potash fetched under $200 a tonne between 2000 and 2007. Then in 2008 it rose to over $800/tonne, briefly peaking close to $1,000. No one expects it to hit those heady heights again, but nor is there any chance they will sink back to pre-2007 levels.
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One factor that kept a lid on prices in 2012 was the deal three years ago where China locked in contracts to buy at $350/tonne from Belarusian Potash and at $355/tonne from Israeli Chemicals — deals that were severely criticised by Potash Corp CEO William Doyle at the time.
Again, these are short-term manoeuvres.
But, once the Uralkali dust settles, we’ll go back to worrying about such things as grain prices, fertilizer inventories, the world economy and exchange rates as they affect potash imports by India and other big customers; we will also be back talking about what new projects are on the horizon (the BHP Billiton Jansen projects seems to have slipped out of the headlines) or whether some may be closed down or mothballed. There will be the cash costs incurred by producers, whether the smaller companies can raise the money to take their projects to development, and so on.
There will be political events — like the change in policy in Eritrea that came near to destabilising that country’s leading potash project.
Not to mention that shrinking arable land area and the swelling world population. And the fact the many people in the developing countries are seeing their incomes rise, allowing them to eat pork or beef rather than just rice and vegetables. Every tonne of pork consumed in China will need 4 tonnes of grain to raise the additional pigs needed; with beef, the figure is 7 tonnes of grain for every extra tonne of meat available.
Only fertilizers can deliver the higher crops yields needed. History is on the side of potash.
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