WINNIPEG, Manitoba/SINGAPORE (Reuters) - BHP Billiton aims to enter the potash business by acquiring the crop nutrient’s top producer, Potash Corp, at a time when both global demand and output are expected to surge.
Demand for potash stagnated last year due to recession and farmers balking at high prices, but it’s back on the upswing as soaring grain values give farmers more money to spend and China and India seek to satisfy a growing appetite for meat.
Those factors are seen boosting potash prices, even though supply is poised to match growth in demand for the next four years, with Canadian and Russian miners following through on mine expansions.
Beyond 2014, BHP controls the key variable to the supply-demand equation with its plans to build the world’s largest potash mine at Jansen in the Western Canadian province of Saskatchewan, eventually pumping out 8 million tonnes annually in stages starting in 2015.
Potash demand looks to jump by nearly 20 percent from an estimated 49 million tonnes of potassium chloride in 2010 to 58.7 million tonnes in 2014, according to the Paris-based International Fertilizer Industry Association.
Global supplies may rise at about the same pace from 2010’s estimated 62.3 million tonnes to 75.1 million tonnes by 2014.
That would leave surplus potash at around one-fifth of total supply and make a Potash Corp takeover a longer-term play for BHP, the world’s largest miner.
“You’ve got a lot of slack and more coming. At the same time, demand will be rising but you’re not raising it fast enough to really eat into that supply excess,” said Charles Neivert, analyst at Dahlman Rose & Co in New York.
“(BHP is) not going to make the money in years 1, 2, 3 -- they’ll start making the money in 4 and 5 and go from there.”
Potash capacity is growing even faster than supply and demand -- by 28 percent to 90 million tonnes in 2014. But the small number of producers traditionally keep actual production low enough to support prices.
Demand for potash, a fertilizer used on sugar, corn, coffee, fruit and vegetables, is rising as growers in Asia, the United States and South America intensify usage.
That trend has prompted a spate of M&A activity including BHP’s $39 billion hostile bid for Potash Corp, and tieups between producers in Russia.
“A key inflection point has been reached for fertilizers, pointing to near-term recovery in global demand and stronger prices,” Toronto-based commodity analyst Patricia Mohr of Scotiabank wrote recently.
Whether those higher prices hold beyond 2014 depends largely on BHP.
The company says it will build the Jansen mine regardless of whether its takeover bid succeeds, and its record shows it favors full-out production to seize market share over the typical potash industry practice of tailoring production to demand.
“(BHP) as an entity will have a lot to say about where pricing goes going forward,” Neivert said.
CHINESE DEMAND KEY AS MEAT DEMAND GROWS
The growth of the middle class in developing nations such as China -- the top potash consumer -- underpins long-range hopes for fertilizer demand.
Over the medium term, China will need to apply more potash to its deficient soils to grow more corn to feed animals and satisfy rising meat consumption, Mohr said.
But China’s dependence on global potash markets has been dwindling in the past several years as local supply has risen, said a report by China Inorganic Salts Industry Association’s potash branch.
In Brazil, the world’s No. 2 potash consumer, imports will likely keep growing as the country’s farm sector expands.
Soybeans account for about one-third of Brazil’s potash demand, while the expansion of cane farming to produce sugar and ethanol will increase reliance on foreign supplies.
India, the world’s No. 3 consumer, is expected to significantly increase its use of potash and other fertilizers following declines last year due to a dry monsoon season.
“I see India’s imports increasing at about 5 percent,” said U.S. Awasthi, managing director of Indian Farmers Fertiliser Cooperative Ltd (IFFCO), India’s biggest fertilizer producer.
U.S. demand for potash should rise as farmers plant more corn, but farmers are concerned that their input costs will increase if the BHP-Potash deal goes through.
“As corn acreage increases, so will the demand for potash and other fertilizers,” said Chip Flory, editor of the Pro Farmer newsletter. “However, after the (price) shock of 2008, farmers are more careful ... in how they handle fertilizer.”
That may mean farmers will use slightly less potash per acre, but an increase in corn acres will offset the per-acre decline, he added.
“They already got us right now, by the throat,” said Wes Exelby, a farmer from Saline, Michigan. “They control the markets and put the price where they want.”
Russia, by virtue of its crop mix and the development stage of its agriculture industry, will not be seeing major increases in domestic potash consumption.
But improving market conditions mean new investment in potash capacity may soon be worthwhile.
Renaissance Capital analyst Marina Alexeenkova said Russian producers were looking for minimum prices of $450 CFR (cost and freight) compared with a current price of about $375-$390 to justify spending on expanding capacity.
“The precursors for prices to rise are there and there will be a price that will satisfy everyone.”
Reporting by Rod Nickel, Nick Trevethan, Euan Rocha, Sam Nelson, Julie Ingwersen, Reese Ewing, Yayat Supriatna and Mayank Bhardwaj; editing by Peter Galloway
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