The Great Potash Power Play
Image Credit: REUTERS/David Stobbe

The Great Potash Power Play

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Potash is perhaps the world’s most strategic fertilizer. Mineable deposits are concentrated in a handful of countries, it cannot be synthesized, and crop yields suffer badly without it. Russia-based Uralkali, the world’s largest potash producer, turned the global potash market on its head when it announced in late July 2013 it would market potash independently and stop selling through the Belarus Potash Company (“BPC”) marketing structure it previously used to coordinate exports and production. Prior to Uralkali’s move, two major global marketers—BPC and Canada’s Canpotex—controlled around 70% of potash volume traded worldwide, which helped constrain supply and keep prices high.

Uralkali aims to boost its market share in China, where it is estimated that each 10 kilos of pork consumed requires 1 kilo of potash to produce, since Chinese pigs are increasingly fed with potash-hungry corn and soybeans. Similarly, every 44kg of rice eaten in China is thought to require 1 kg of potash to grow, with application intensity likely to rise in the year to come as China runs short of arable land and seeks to produce more grain from a static land area. Uralkali exported approximately 2 million tons of potash to China in 2012—primarily by rail—and now wants to increase this to 2.5 million tons per year, approximately 22% of China’s forecast 2013 potash demand.

China and India are the world’s largest and fourth largest consumers of potash, respectively, yet farmers in both countries still under-fertilize because potash has often been too expensive for them. This has taken a sizeable toll in the form of lost grain productivity and helps make both China and India more dependent on imported grains. Academic studies show farmers in both China and India can significantly increase yields of wheat, rice, and corn by using more potash—achieving gains of as much as 15-20% in areas such as Northern China where intensive farming and improper fertilizer use has depleted soil potassium levels.

Potash—perhaps even more so than oil—may emerge as a commodity space where China and India compete head-to-head to secure new supplies that both ensure availability of this critical fertilizer and also confer bargaining leverage when Chinese and Indian buyers negotiate with foreign potash suppliers in Russia and Canada.  

Potential potash mine buyers in China and India will feel pressure to move quickly because the market gyrations Uralkali set in motion will likely drive potash prices up again. As lower prices unleash pent-up demand for potash, farmers in price-sensitive emerging markets such as India and China will reap larger crops. Once more intensive potash use takes hold on farms in emerging markets and developed world farmers also boost application, there is a real chance that structural shortages will begin to re-emerge and prices will once again start to climb.

Indeed, we estimate that based on cultivated land area and academic research on the ideal soil potassium level for growing wheat and corn, applying the necessary potash volumes on the North China Plain alone could increase global demand by more than 5%. Multiplied across farming regions in China, India, Africa, Southeast Asia and Latin America, this increased application could dramatically increase potash demand and cause prices to spike.

Because farmers can apply and withhold potash over time to manage soil inventories of potassium, the dynamic discussed above will likely require 3-5 years to fully manifest itself. When it does, it will usher in a prolonged period of price volatility that in some ways reinforces itself by making investors more hesitant to enter new projects.  The winners in this environment will be those who can put potash on the market more cheaply than most other producers. Ethiopian suppliers are very competitive in this respect, with their low production costs and close proximity to the world’s largest potash consumers.

Thus, the stage is set for Chinese and Indian companies to compete more vigorously than before for potash assets in Ethiopia. Both countries are short on grain, and obtaining additional potash supplies from Ethiopia would help increase bargaining leverage against Russian and Canadian suppliers. For these reasons, plus the intrinsic opportunities for returns on capital created by the current decline in potash pricing, Chinese companies are actively seeking to acquire overseas potash mines.

Ethiopia: Potash Battleground

While Uralkali management is focused on China, the strategic repercussions of a new potash world that will be more volatile than the old one resound especially loud in Ethiopia, where Allana Potash* is working to develop reserves that could become the cheapest in the world to mine and deliver to markets in China and India.

Comments
6
An Actual analyst
December 16, 2013 at 16:05

This article is painful to read. First, a 2 minute search on Urakali’s website would show that Uralkali exported 2.4 mnt to China in 2012 (~ 2 mnt by rail and 0.4 seaborne)…I don’t know where the author gets that Uralkali plans to increase market share in China, since he provides no sources or explanation for this claim.

Second, for some reason the author assumes that there is a lack of available supply in this industry – when, in actuality, the industry is heavily oversupplied. The industry has never run above 75% capacity utilization since 2007..Furthermore, guidance from both Uralkali and PotashCorp puts 2014 global demand at 56-60 mnt – that’s 75-80% global capcity utilization. There is never, has never and will never be competition for resources between China/India as the market is heavily oversupplied (and with the massive greenfields/brownfields under development, there will never be a lack of resources for the heavy importers).

Third, China and India will feel pressured to act quickly? Why!? because of Uralkali’s “market gyrations”…what does this even mean?? China has always set the price bottom for other contract/spot importers, and China has 3.0-3.5 mnt of inventory heading into 2014 – there is absolutely no reason for them to ‘rush’. Also, 4Q is low season and most importers don’t need to restock until Feb ’14 – spot prices are still in decline in December.

Fourth, 3-5 years will usher in price volatility?? If by price volatility, you mean an oversupply scenario ushering in lower prices..then yes, the enormous amount of greenfield capacities coming online in 3-5 years (Canada, Russia, Ethiopia, Laos and Congo).

Ethiopia isn’t even the most promising greenfield!! It’s Eurochems mines in Russia, Mengo in Congo and BHP’s Jensen in Canada.

1 mntpa from Ethiopia will hardly make a dent…How about Eurochems 4-8 mnt a year in Russia (expected to ramping up in 2015-16)? or China own Laos project, which will output up to 8 mnt per year when ramped up…

When BHP lost their hostile bid for Potashcorp, they started the 8 mntpa Jensen mine…you don’t even mention this!!

There’s many many more incomplete assumptions, unnecessary omissions and errors in this write-up. I would urge the author to do more homework and try to understand the industry better before publishing.

Muhammad NaIya
August 30, 2013 at 16:35

Somehow the writer seems to have leftout the Spanish Sahara where the Morrocan administration has usrped and displaced the original inhabitants of the region. This has led to the Sahrawi conflict that the world somwhow forgot because the Morrocans are 'freinds' of the great powers of the West. The reason for all the war, neglect and suffering is of course the large Potash deposits tha feed the West and African farms. Ironically many African farmers have been denied an excellent fertiliser dredding in the form of Calcium Ammonium Nitrate basically due to US pressure on the manufacture and marketting of the brand on account of the never ending US war-on-terror.

G.L. Betti
August 26, 2013 at 00:53

I -partially- agree with the comment refering to the lack of accuracy due to the exclusion of an important player from the global fertilizer scene (but, further, even of european players which are relevant not just because of dimension like german K+S). But I could even say that I -partially- agree adopting other aspects.

The main matter instead is a different one, in which the fertilizer scene is just an excellent key of lecture of still existing issues of world order: leading global powerships, role of sovereignities and a combination of the them with an increasing speed. Just one brief and simple consideration: more volume of potash froma Russia to China (let me feel authorized to call the players by their real names) for a more convenient aboslute price (for China) and a bigger slice of the market (for Russia) leads to a level of deeper relations in the Big East. The possible reactions of this in the Western world are larger than the number or words used here.

Gaurav Tripathi
August 25, 2013 at 21:47

Good Article! The Great Bargain will start.. Indians and Chinese need to work hard , if they want to have a competitive game! 

#Potashmania

Dewey Last
August 24, 2013 at 07:33

The research on this article is poor. Israel Chemicals is the lead company in the development of Allana Potash. And Potash is not so rare as this article has led the uninformed reader to believe. IC has developed 64 sq. km. of their concession in Spain which has a total land area of 640 sq. km. Ethiopia is closer to India and China than Spain, however the cost to transport is not too different as inland freight costs have to be included, as well as infrastructure and costs to bring Ethiopian Potash to the nearest port of Tadjera in Djibouti. I am sure the Djibouti will want their cut also. 

Dewey's Article Rank: 2 stars out of five. The author needs to put in another ten minutes of research before he writes articles like this. 

 

9 dashes, 4 dishes, 1 soup
August 24, 2013 at 01:09

This is a great article. I wish the Diplomat would publish more articles like this – and fewer where experts pore over every word in a Jinping press release. 

The only fault I can find with this article is the author did not tell us what potash is. (Mined or manufactured salts that contain potassium in water-soluble forms). But that's a small issue. Mr. Collins' article was full of information I knew nothing about. I was able to learn something by reading it. 

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