PotashCorp CEO Bill Doyle believes that the market for potash in 2012 is going to be very tight, in large part because of capacity constraints on the production side, and the fact this year’s macroeconomic uncertainty left farmers uncertain about the future.
That means inventories were run down as fertilizer purchases were put on hold until some semblance of economic stability could be seen. Doyle said those inventories will have to be restocked, and, given the soaring food prices this year, the farmers have the money in their pocket to buy the needed soil nutrients to ensure future crop strength.
“We expect North American potash markets to be extraordinarily strong. We have record farm income this year, and so it's not a reflection in any way, shape or form of what we think is a lessening situation in North America,” he said, during the analyst conference call Thursday to talk about the potash giant’s stellar Q3 results.
Having said that, Doyle was asked about future demand for potash, not in one or two years, but seven to 10 years out.
The reason for the question? There have been a lot of forecasts and promises made in the sector during the past little while.
A few examples:
- The Chairman of China's potash association saying that the country will be potash independent by 2015 to boost domestic and offshore investments;
- India potentially looking to acquire a stake in Belaruskali for supply security;
- Vale looking to make Brazil potash independent by 2020 or so;
- Uralkali’s $5.8 billion greenfield and brownfield expansion plan; and
- A simple comparison of high greenfield capex costs in Saskatchewan versus lower estimates in Russia and other rival markets.
“Where do you think all of Canpotex's incremental tonnes will find a home if things play out?” one analyst asked.
(Canpotex is, of course, the distribution and marketing arm for the potash troika, PotashCorp, Agrium and Mosaic.)
Doyle, who is never, ever at a loss for words, agreed, saying that, yes, there have been a lot of pronouncements in the potash world.
“Some of them are questionable, I think,” he said. “You talked about China becoming potash independent by 2015. I would just say that announcement might have something to do with the upcoming negotiations here for 2012.”
(Doyle said in a response to another analyst that he thinks there will be substantial potash price increases in 2012. Currently, the market is looking at 2012 potash deliveries starting at $530 a tonne.)
“The (Chinese) throw everything and the kitchen sink in the potash. I mean, they don't talk about a myriad of potash. They just say potash, so that includes SOP, and it includes lower grades of KCl.
“If you look at the numbers and you know what's being produced, China has no opportunity to be independent of potash imports in 2015.”
He said the real situation in China is that the country will be 75% dependent on imported potash for the foreseeable future, according to his commercial counterparts in China.
“The Indian negotiations with Belaruskali, I really don't have much of a comment on that,” he said. “I understand Belaruskali has kind of opened it up to a minority position to the highest bidder, but I haven't seen any activity there. India, of course, is 100% dependent on imported potash. “
As for Brazil, well, Doyle reckons that potash independence is a stretch.
“You have limited resources in Brazil in that Cergi Bay [phosphate] area. There's an Amazon deposit that's been talked about, but I mean you're talking about a very expensive, difficult project in a high humidity climate. You know potash is hygroscopic. It doesn't do well in that type of environment,” he said.
And then he talked about Russia, Uralkali and the costs of building new potash mines, especially for companies that are new to the sector.
“Uralkali's announcements about a lot of brownfield capacity coming forward, I guess, between $5 billion and $6 billion between now and 2021, I don't know how you pinpoint costs over a 10-year period,” he said.
In other words, Uralkali will have to compete for the same structural steel, the same copper, the same concrete engineering work as its rivals.
“And I know their labour costs are increasing about 8% to 10% a year,” he said.
Doyle said the interesting aspect about Uralkali’s brownfield intentions is the obvious advantages that kind of expansion has over expensive greenfield projects. Doyle’s comments put some of the more recent greenfield efforts in the spotlight, not least of which is BHP Billiton’s multi-billion dollar effort to open new potash mines in Saskatchewan. BHP Billion is, of course, the Australian-English commodity giant who tried to take over PotashCorp last year for $38 billion.
Doyle said any greenfield project should be resigned to high capital costs, not in competing with other greenfield projects over start-up costs.
“I don't know how you compete with a greenfield mine at today's prices. We know they can't be economically justified. That's why you have no one going ahead with greenfield today,” he said. “We've had a lot of delays in the people who've been looking at greenfields. And the reason is you just can't make the numbers work. There's no mystery to it.”
And, one more time, Doyle referenced those companies out there who are intent on starting a potash mine from scratch. No mention of BHP Billiton, of course. That would be rude.
“It’s just a huge advantage to already be in the business versus someone that's come in from the outside that's got to start from scratch,” he said.