By Gavin du Venage, South African Editor

The potash industry has undergone a shakeup that has rattled the industry and threatened the suspension of some world-class projects, putting a question mark on the viability of African producers

Allana2A breakup of the potash cartel could stimulate demand on the back of weaker prices, boosting producers such as Allana. (Photo courtesy of Allana)

In late July Russian, fertilizer giant Uralkali set in motion one of the biggest earthquakes to hit mining in years. It pulled out of its trading partnership with Belarus potash producer Belaruskali, a cartel-like arrangement that had the same impact on global fertilizer supplies as Opec does on the price of oil. The Russian producer left no doubt what the effect of this would be: Uralkali said it expected the price of potash to fall 25%, to around $300 per metric ton (mt), a level that many current producers would find difficult to sustain.

Editor’s note: After a meeting failed to reconcile differences with the Belarusian potash producer (the other “partners” in the Russian cartel), Uralkali CEO Vladislav Baumgartner was arrested on August 26 at the Minsk airport. He remains in jail as this article goes to press. The market also took another turn when Uralkali announced that the Chinese purchased a 12.5% stake in the company, which will probably further break apart the Russian potash cartel.

The shattering of the cartel could endanger African projects that are beginning to get off the ground. Globally, projects that were set in motion when the mineral was trading above $900/mt are either coming into production or, for greenfield sites, getting to the point where CEOs need to ink their names. All told, there are more than 200 potash projects proposed worldwide.

BHP alone has projects expected to cost more than $10 billion ready to be signed off on, including the vast Jansen deposit in Canada. Rio Tinto has also announced a joint venture with North Atlantic Potash, the Canadian subsidiary of Russia’s JSC Acron, to build another mine in Saskatchewan. There is also a line of other junior mining companies seeking to ramp up potash outputs, if there is market. 

“Demand growth has been stemmed by pricing behavior in recent years. This move should allow demand growth to return, but price stability is important as well,” said Paul Burnside, manager Fertilizer Analysis Products at CRU, a London-based mining, metals and fertilizer consultancy.

“Some juniors have put a positive spin on the prospect of lower prices—that it will encourage greater discrimination of project economics. But obviously the prospect of lower prices—and hence lower cash flows—is only going to make it harder to win investment,” Burnside said.

About 3 million mt of phosphorus could come online by the end of 2013, with the North Africa and Middle East areas set to see increased production in the coming years, according to CRU. 

Against this, backdrop demand will remain fairly robust. The International Fertilizer Association (IFA) predicts the compound annual growth rate of the fertilizer market at 2.1% through 2016-2017, with potash growing 3.7% a year, phosphates expanding at 2.3% and nitrogen rising at a modest 1.5%.

Burnside said Uralkali’s announcement seemed designed to scare investors, it hasn’t actually changed his medium term view much. Over the last five years, producers have chosen to curb demand growth through pricing, but many have also been expanding capacity, and the pressure to improve utilization rates was only going to increase. Uralkali has taken a calculated risk to accept sharply lower prices in the short-term—though he does not think the market is heading for cost-driven pricing—in the expectation that it can maintain profits through higher volumes. It will also hope that by acting now, it will stop any new greenfield projects reaching production. “Although some of these projects have highly competitive operating expenses (opex), anyone wanting a decent return on investment will need prices to be much higher than that to cover the capital costs of building new mines.”

The mining operations themselves seem to think they can ride out the current turmoil, and deliver competitive projects. “African projects have relatively modest capex, and also pretty good opex when you factor in the cost to deliver to target markets,” said Burnside. “But potash is not a scarce resource—there is already spare capacity, and projects already under construction are likely to cover rising demand well into the 2020s.”

One of the largest projects under way is MagIndustries, which is moving ahead with its Mengo potash project in the Republic of Congo. The Canada listed, but Chinese owned, company has just signed a construction contract with East China Engineering Science and Technology Company (ECEC). It has also asked the China Development Bank (CDB) for $1 billion in financing for what the company said is one of the world’s largest undeveloped potash projects. 

Chen Longbo, CEO of MagIndustries, told E&MJ neither the company nor its backers have any intention of halting the project. Nor does he share the gloomy $300/mt prediction. “While in today’s generally weak trading environment for potash we can reasonably expect some downward pricing pressure, it seems rash to forecast a drastic, long term change to pricing,” Longbo said in an email. “We think that over the long term, sellers can be expected to act rationally to optimize their returns and that potash demand will continue to grow as a function of agricultural output.”

The Mengo deposit is about 15 km northeast of the port city of Point-Noire and is expected to produce 1.2 million mt of the fertilizer annually.

The current turmoil, said Longbo, will have little impact on either MagIndustries or its financier, the CDB. “China and Chinese companies typically take a very long view on matters of strategic interest to the country and we wouldn’t expect CDB to change its views on the long term merits of our project,” he said.

Another company taking the plunge is Allana Potash, a Canadian junior developing four concessions in Ethiopia’s north eastern Danakil Depression. The Danakil Potash Project as it is called, stretches over approximately 312 square km. Work on development is also progressing and will not be impeded by recent events, said Richard Kelertas, Allana’s senior vice president of corporate development.

“We are full steam ahead,” Kelertas told E&MJ. “As a very low cost producer—by 2015—we are in very good shape and well positioned to get our project fully financed and built.”

While price decline for potash is inevitable, Kelertas does not see this as necessarily being a bad thing. Fertiliser accounts for up to a third of agricultural input costs, which means that farmers will often try find cheaper substitutes or get by with as little as possible, especially in poorer regions.

“This likely will kick-start a positive demand response out of India, China and in many other regions” Kelertas said. “But will likely take several months for current inventories to get worked down.”

Longbo agrees: “Without question lower pricing should translate to higher demand; that’s Economics 101. In our view the agricultural research suggests that potash has been historically under-applied in many importing regions, and lower pricing might encourage agricultural practice to catch up with soil science.”

The major suppliers of potash are a relatively few companies located in Canada (which has nearly half of the world potash reserves), Russia, Belarus, Brazil, and Israel. All will now be scrabbling to adapt to a radically different market. 

“It will be interesting to see what Canpotex’s response to all this is,” adds Kelertas “and also if BHP cancels their huge Jansen project in Canada.” 

Asian Demand
For Ethiopia, the stakes are especially high. Once the poster child of African deprivation and want, it now has a thriving, albeit tiny economy. The country is heavily dependent on agriculture, but the government is eying mining—less than one percent of GDP—as a central plank to development. Potash is a resource that shows plenty of potential.

“The deposits in the Dankhil Depression are likely the lowest production cost deposits on earth because the extremely hot and dry climate is ideal for solution mining,” said Gabe Collins, Co-founder of China SignPost and JD Candidate at the University of Michigan, a researcher into Ethiopia’s trade links with China. “To boot, the areas appears to have a rechargeable aquifer that can sustain mining operations.”

He noted that Ethiopia could potentially be the closest large volume seaborne potash supplier to India, China and emerging African agricultural markets. With proper rail infrastructure it may be possible for operations such as Allana to deliver potash to global markets such as Brazil—another big buyer—more cheaply than Uralkali can from its mines in the Russian interior.