Uralkali fires a capital destructive (including it’s own) first shot in the potash war
By Cam Read – 02 August 2013
With the relatively recent demand and price increases of fertilizers there has been a corresponding proliferation of prospective producers and the perceived threat of a supply glut looms, or does it? I will discuss potash here as it’s the most contested of the three primary fertilizers, and the one I’m most familiar with. I submit that the large buyers have, in my view, artificially created the fear of over supply through relatively small investments and, conditional to unlikely financing, off take agreements with juniors they likely will never have to honour. The result has managed to keep potash prices depressed for buyers but still profitable to varying degrees for high volume cartels/producers, while effectively shutting the door to financing largeCapex entries’ new projects. The latest salvo delivered by Uralkali has intensified the battle in a very big way, although I highly suspect once the wolf has frightened the sheep afield, business as usual will be the order of the day. With many prospective greenfield and brownfield expansion projects hanging in the balance this may be enough to sever any hopes and set back the clock to the pre 2007 field of players and a rebalancing of market share, with a few of those now on the outside looking in, most notably K&S in my opinion, short of any strategic acquisitions that can make them a player in what may, at least temporarily, be a new potash paradigm. That’s my view of the more reactionary supply side situation.
More critically I submit, is the real driver, the demand side, mainly China but also India and, to a lesser extent, Brazil. The critical mistake the cartels made, in my view, was allowing the price of MOP to escalate over $800/tonne in 2008. That was the game changer which not only compelled their customers to seek out alternate sources, but also opened the economics to a proliferation of hopeful greenfield projects and potential competitors, most of which would never have been formed if potash was kept below $500/tonne. China and Brazil have since pushed to develop internal supply, with China utilizing it’s vast foreign reserves to also buy in and/or develop potash mines outside it’s borders from various Asian countries and Africa where favourable economics dictated. The tipping point will become evident in coming years as their investments reach full production, effectively shutting out much of the cartels’ biggest market to their imports. Brazil is hoping as well to eventually source much of it’s potash from the Amazon basin and possibly Argentina and Chile in coming years too, and is actively pursuing that path. The US has potash reserves and many explorers/developers of it’s own in New Mexico, Utah, Arizona and possibly a southern extension of the Devonian Evaporite to exploit as well as some other prospects too, so self sufficiency is not out of the question there either. India, Europe (has supply, but expensive to mine), Indonesia and other smaller spot market users as the odd men out by virtue of no economic domestic sources to develop, but being buyers in a drastically reduced pool among a sea of sellers could prove very beneficial for them for price realization in future. Obviously, it will take a couple decades for many of these scenarios to play out in whatever way they actually may, but only the best prepared and agile companies with an agile and adaptive strategic plan will find a place at the table in my opinion.
In summary, what I see is high cost first world producers may well have to buy assets in much more cost effective areas like Africa that have far lower relative Capex and Opex costs and are closer to end users, much like Potash Corp. attempted to do in their unsuccessful majority push for Israel Chemicals recently, ironically rebuffed by the Israeli government. A wild card in my view will be which companies can indeed find a seat at the table in the new and shifting dynamic at play here, but I believe the markets may well become less global and much more regionally based out of necessity and Africa in my opinion will emerge a critical strong new growth market over the coming decades. The first movers there may well be the upstarts which survive the coming crunch, and in my grossly biased opinion, Allana Potash has the critical advantage as East Africa’s first potash producer, closest to India, under $100/tonne Opex FOB Djibouti, funded on the best of terms by Exim and development banks, and in the fastest growing area of the world with unfettered access to the COMESA market as it achieves it’s agricultural transformation, partly through the use of potash, a nutrient the region is grossly deficient of for lack of application. The coming years will be interesting no doubt.
Disclaimer: Yes, I own shares in Allana Potash and am grossly biased.