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.
Ethiopian potash resources enjoy three key advantages that will likely make them a strategic prize for Chinese and possibly Indian bidders. First, Ethiopia is in a strategic location near the Indian Ocean and a relatively quick sail to India and China both. Second, geological studies commissioned by mining companies operating in the region suggest that Ethiopian potash reserves could potentially be the third largest globally after Canada and Russia and would be able to support production of one million tons per year and perhaps more. Third, Ethiopian potash is cheap to produce and may be the cheapest in the world delivered to India and China. It is solution-mined by injecting water into the deposit, bringing the brine to a surface pond for evaporation, and recovering the dissolved potash.
Even if the potash market stabilizes and prices return to where they were prior to the BPC falling out, trust between major producers has been severely undermined and the lower-cost producers will be much more inclined than before to follow a strategy that emphasizes volume over price. That would make a major low-cost Ethiopian mine a prized asset for Asian investors.
Competition between China and India for influence and natural resources in Africa is well-documented. Simultaneously, there are few global potash suppliers—and even fewer that would actually be open to large-scale foreign investment, as evidenced by Canadian opposition to BHP Billiton’s bid for PotashCorp in 2010. Ethiopia is a big prize, given it has the potential to be the world’s fifth or sixth largest potash producer.
China’s current political and economic uncertainty, along with medium-term trends toward higher potash demand as grain and meat consumption increase, would make an overseas potash investment attractive. Meanwhile, the government would almost certainly welcome having a greater proportion of the country’s potash needs flow through Chinese-owned miners, traders, and shippers.
The current global trend of lower staple grain prices will not lull Beijing into thinking food security issues are off the table. Potash helps grain crops withstand drought and other tough conditions, and increases yields substantially when applied to fields deficient in it, allowing Chinese farmers to wring more grain out of a shrinking arable land base. Moreover, China’s new leadership is almost certainly acutely aware of the fact that famine helped topple at least five of China’s 17 dynasties.
Given these powerful strategic drivers, Chinese fertilizer companies and the government that, in many cases, directly owns shares in them, will view the turmoil afflicting the global potash market as a buying opportunity for which Chinese companies deserve full state diplomatic and financial support. While Indian investors tend to move more slowly, Chinese companies are already making major investments in Ethiopia, which helps build goodwill with Ethiopian officials and creates deep pools of regional knowledge among Chinese investors and their advisors. For instance, ZTE and Huawei recently won a US$1.6 billion contract to develop communications networks in Addis Ababa and other parts of the country.
Chinese investors also have the advantage of being able to point to prior large scale mining projects such as CNPC’s oil developments in Sudan and roads and power plants in Kenya as proof that they are partners who make long-term commitments and can access finance and construction capacity and get major projects up and running in a relatively short timeframe. Ultimately, this type of local market knowledge and goodwill are likely to prove fungible if Chinese fertilizer and mining companies decide to make a run at Ethiopian potash reserves and will help make Chinese bidders more competitive than their Indian peers.
Ethiopia’s potash will fertilize crops in India and China by 2016, but China is best positioned to win the competition for potash mines in East Africa and will strive to become a price setter while Indian buyers remain price takers.
Gabe Collins is the co-founder of China SignPost and a former commodity investment analyst and research fellow in the US Naval War College's China Maritime Studies Institute. He can be reached at [email protected].
*Disclosure: The author holds Allana Potash along with other equities in a personal investment account.