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The Great Potash Power Play (Page 2 of 2)

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.

China’s Advantage

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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. 

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