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Long term projections for Potash demand are stable and likely to moderately increase year-over-year. The quantity of high-quality arable land is decreasing. Human population is expected to increase by 3 Billion people in the next 37 years. There are no precise substitutes for potash. It is proven to considerably increase yield quantity and quality on almost all crops. The cumulative effects of the above factors will drive demand.
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Potash Market Snapshot January 2012
Long term projections for Potash demand are stable and likely to moderately increase year-‐over-‐year. The quantity of
high-‐quality arable land is decreasing. Human population is expected to increase by 3 Billion people in the next 37 years. There are no precise substitutes for potash. It is proven to considerably increase yield quantity and quality on almost all crops. The cumulative effects of the above factors will drive demand.
A shift in the market structure of potash supply and demand is slowly unfolding between net importers and suppliers.
Suppliers have been able to control the price mostly by shutting down or slowing production to match demand. Three North American producers currently produce about 66% of the world’s supply1. These three producers formed export entity Canpotex which increases their pricing power and collective market influence2. Combining Belarusian Potash
Company’s market share with Canpotex market share accounts for nearly 75% of the total potash market3.
In 2010 BHP Bilton attempted a hostile take-‐over of Potash Corp. The take-‐over was denied by the Canadian government on grounds of concern that BHP openly wished to dissolve Canpotex (Potash Corp is a majority player). If BHP dissolved Canpotex, the likelihood of a substantial decrease in tax revenue due to more competitive market pricing since the three
major Canadian producers wouldn’t be exporting in conjunction with each other, was grounds for the government to deny the take-‐over4.
On the other side of the market shift are sovereigns such as China and India when combined boast approximately a third of the world’s population and require substantial quantities of Potash to boost crop yield to sustain rapidly growing
populations and the increasingly agriculturally intensive appetite of the middle class.
Keys to long term demand stability:
-‐ Population growth
-‐ Economic growth (Rising numbers of the middle class and subsequent dietary shifts mean a heavier emphasis in refined sugars and large animal protein requires increasing yields and thereby increases potash demand.)
-‐ Decreasing arable land
-‐ Decreasing water supply reliability
-‐ Crops used in food, animal feed, & bio-‐fuel
Threats to demand stability:
-‐ Weather Disasters (drought, flood, hurricane, fire) that ruin entire region’s crops & potentially in turn, note-‐ably decrease potash demand for the short-‐term
-‐ Unforeseen sizeable reduction in world population
-‐ Economic downturns
1 Wall Street Journal. “Potash Miners Settle Pricing Suits” Thursday, January 31, 2013 by Alistair MacDonald. 2 http://www.theglobeandmail.com/report-‐on-‐business/international-‐business/asian-‐pacific-‐business/india-‐has-‐enough-‐potash-‐to-‐keep-‐canpotex-‐waiting/article7492928/?cmpid=rss1 3 http://thebusinessofmining.com/tag/canpotex/ 4 http://www.thestreet.com/story/10879096/1/report-‐says-‐bhp-‐bid-‐would-‐cut-‐government-‐revenue.html
A set of ‘mega-‐forces’, as described by KPMG, including population growth, economic growth creating higher incomes leading to changing dietary habits, ecosystem decline, water scarcity and global weather weird-‐ing patterns are all
substantial variables, functioning in conjunction to affect potash demand.5 Individually these forces are possible to predict with some level of confidence, but predictability is problematic when considering the potential cumulative effects of their interaction.6 Even with the variability in these events, projections are for demand to increase at a rate of
about 3% per annum (as an extrapolation of demand growth over the last decade.).7 China will likely have a higher demand growth rate than the global average.
Given that India imports 100% of its potash needs and China will be importing around 80%, they are heavily reliant on suppliers8. Since the suppliers have shown they are willing to charge premium prices, companies and the governments in
China and India are looking into other methods to assure potash supply including funding junior miners. At the end of 2012, one of India’s major chemical/fertilizer companies purchased a 20% stake in a junior mining company based out of Alberta, Canada guaranteeing it will purchase potash from the company for the next 20 years at or near market prices.9
This is one method that individual companies on the demand side may take to assure a secure, continuous, affordable supply of potash. Others are likely to use this approach as well. If enough demand is met through these smaller suppliers, it will slowly shift the market dynamic, and level out the pricing power that current producers enjoy.
There’s also the potential private funding may finance smaller mining operations if economical. There are substantial
barriers to entry in this industry, including capital necessary to finance mine development, time required to get a mine up and running, infrastructure investments needed in many locations, regulatory environmental impact studies and permitting. These provide enough of a barrier that the main producers have a moat of safety in terms of how quickly
production may be ramped up, and they have enough established potash fields that they can increase production as needed to make production less economical for others. Further cushioning this margin are low cost mines that can be put into production to drop the market price enough that it is un-‐economic to invest in a new mine.
As key-‐importers reduce reliance on the major potash producers, the current market structure will come under increasing pressure. Oversupply of potash is projected through 202010.
Given the variables in the market, demand overall will continue to increase, and the outlook is favorable. With recent market pull backs, this is likely a timely entry point for a long-‐term potash investment as potash is a robust investment
over the long run. Volatility is to be expected as suppliers & importers hash out the longer-‐term market dynamics, and as the variable ‘mega-‐forces’ contribute to swings in supply and demand.
Contact:
A. Rider WealthMark LLC.
1329 N. State Street, Suite 206 Bellingham, WA 98225
5 https://www.rabobank.com/en/research/FAR/recent_publication_1.html 6 Ibid 7 Ibid 8 http://potashinvestingnews.com/6930-‐potash-‐supply-‐contracts-‐india-‐china-‐canpotex-‐sinofert-‐vale-‐demand-‐price.html 9 http://www.theglobeandmail.com/globe-‐investor/karnalyte-‐signs-‐potash-‐deal-‐with-‐indias-‐gsfc/article7174175/ 10 https://www.rabobank.com/en/research/FAR/recent_publication_1.html
Appendix
http://beta.fool.com/maysreport/2013/01/10/did-‐india-‐just-‐acquire-‐more-‐leverage-‐against-‐canad/21242/ http://beta.fool.com/tarunbachhawat/2013/01/09/mosaic-‐theory-‐growth/21134/ http://thebusinessofmining.com/tag/canpotex/http://www.bbc.co.uk/news/world-‐us-‐canada-‐11680181 http://www.dailyfinance.com/2013/01/07/what-‐mosaics-‐beat-‐means-‐for-‐fertilizer/ ftp://ftp.fao.org/ag/agp/docs/cwfto15.pdf http://www.theglobeandmail.com/globe-‐investor/canpotex-‐and-‐potash-‐the-‐monopoly-‐behind-‐the-‐mineral/article1241076/?page=all http://www.theglobeandmail.com/globe-‐investor/karnalyte-‐signs-‐potash-‐deal-‐with-‐indias-‐gsfc/article7174175/ http://www.theglobeandmail.com/report-‐on-‐business/international-‐business/asian-‐pacific-‐business/india-‐has-‐enough-‐potash-‐to-‐keep-‐canpotex-‐waiting/article7492928/?cmpid=rss1http://www.potashcorp.com/media/Doyle_Presentation.pdf http://potashinvestingnews.com/6930-‐potash-‐supply-‐contracts-‐india-‐china-‐canpotex-‐sinofert-‐vale-‐demand-‐price.html http://potashinvestingnews.com/6930-‐potash-‐supply-‐contracts-‐india-‐china-‐canpotex-‐sinofert-‐vale-‐demand-‐price.html https://www.rabobank.com/en/research/FAR/recent_publication_1.html http://resourceinvestingnews.com/46510-‐passport-‐potash-‐low-‐cost-‐potash-‐producer-‐potential.html http://seattletimes.com/html/businesstechnology/2013205795_apcncanadabhppotashcorp.htmlhttp://www.thestreet.com/story/10879096/1/report-‐says-‐bhp-‐bid-‐would-‐cut-‐government-‐revenue.html http://seekingalpha.com/article/1012601-‐legendary-‐investor-‐jeremy-‐grantham-‐has-‐identified-‐a-‐quasi-‐monopoly-‐i-‐d-‐like-‐to-‐profit-‐from-‐it?source=yahoo http://www.theglobeandmail.com/globe-‐investor/a-‐canadian-‐prairie-‐game-‐changer-‐bhp-‐bets-‐big-‐on-‐potash/article6122809/ http://seekingalpha.com/article/272418-‐playing-‐the-‐fertilizer-‐trade-‐with-‐potash http://www.thestreet.com/story/10879096/1/report-‐says-‐bhp-‐bid-‐would-‐cut-‐government-‐revenue.html http://www.noble.org/ag/soils/nitrogen-‐fertilizer-‐worth-‐cost/ Wall Street Journal. “Potash Miners Settle Pricing Suits” Thursday, January 31, 2013 by Alistair MacDonald.
