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China In Race To Corner Canada’s Potash?
Fri, Oct 23, 2009
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By Kishori Krishnan Exclusive To Potash Investing News
The global fertilizer industry looks to the world’s biggest potash producer for guidance, but with Potash Corp of Saskatchewan Inc turning up disappointing figures on Thursday, attention has turned to the continuing caution among buyers around the world.

The world’s largest mining company, BHP Billiton Ltd (BHP:AX), which has been a rumoured suitor for months and has been toying with an estimated price of $40-billion, could well turn away to more interesting tidbits, given the current scenario.

BHP had said potash is “seen as an opportunity,” when asked whether the company would buy its way into the fertilizer industry or develop its own properties. Potash currently has a market value of US$ 28 billion.

But National Australia Bank Ltd issued a report suggesting that BHP’s credit rating would likely be downgraded if it bid for the Saskatoon-based company, saying it would be “a big bite” even for a large company such as BHP.

Potash shares had gained almost 15 per cent in the last five days, after Bank of America Merrill Lynch suggested BHP could afford a 30-per-cent premium to current share prices if it bid for the fertilizer giant.

However, with the firm posting an 80 per cent drop in profits, any deal would be tough. All of this coming at a time of great uncertainty for the fertilizer industry.

Earnings slashed

Sales of the TSX market heavyweight Potash Corp fell to US$ 1 billion compared with US$ 3.1 billion in the same period last year. Net income was US$ 248.8 million or 82 cents a share, a drop from $1.2 billion or $3.93 per share in the same period last year.

Potash also slashed its earnings estimates and production this year, reducing the amount of potash it plans to bring to market this year by 5.5 million tonnes. It also said fourth-quarter profit likely would range between 65 cents to 85 cents, compared with the $1.18 analysts expected.

And this was just months after the firm declared an end to the “depression” in potash prices.

Chief executive officer Bill Doyle said the sharpest slump since the collapse of the Soviet Union has made forecasting difficult. From January to June, global exports fell by 72 per cent. Prior to that, the worst ever six-month decrease saw volumes slip 27 per cent.

“Everyone would like to know the date or even the signal that will mark a return to normal markets,” he said. “We thought [a contract settlement with India] would ease the uncertainty, but that has not happened,” Doyle said.

Hunger pangs

With countries such as China desperate to feed its growing population, could the Chinese market bolster demand and put a bottom on prices that have fallen from US$ 1,000 a tonne last year to about US$ 500 a tonne this fall?

What about growing hunger pangs and the fears that China could end up cornering the market?

On Monday, China’s national Xinhua news agency reported that Beijing-based Zhongchuan International Mining Corp signed a deal to explore for potash on a Saskatchewan land parcel with annual capacity of three million tonnes.

According to the Saskatchewan Energy and Resources, the company’s Canadian branch, Canada Jiuyi Mining Investment Ltd, has been conducting drilling and seismic tests on land southeast of Saskatoon, since it received a potash exploration permit from the provincial government in September 2008.

Also in September 2008, a second Chinese company, Taiji Resources Ltd, signed a memorandum of understanding with First Nations group to develop potash resources near Dafoe, Saskatoon, about 160 kilometres east of Saskatoon.

All’s well?

An expert on Canada-China investment relations with the Asia Pacific Foundation of Canada has, however, allayed fears, stating that Chinese investment in Canada’s potash resources is a “win-win” situation for both economies, despite differing local opinions on environmental and social consequences.

“From an economic perspective, it’s obviously a win-win situation because any investment creates more business, more jobs for the local economy,” said Kenny Zhang. “Basically, the Chinese companies are interested in everything,” he added. “They want to explore business opportunities…because they are the only country that has deep pockets now in the recession.”

“There’s this conclusion that Chinese investment is a scary thing, but an investment is an investment, money is money,” he added.

China imports 5 million to 8 million tonnes of potash a year, giving it a key role in the market for the commodity, one of the essential minerals needed for plant growth, alongside nitrogen and phosphate.

China’s huge purchasing power gives it the ability to negotiate aggressively with suppliers, who have already been forced to cut prices due to a global slump in demand.

Energy and Resources Minister Bill Boyd gave his own take. “Any major financial results from Chinese activity in the province’s potash industry is still a long way off. It’s only a “pre-feasibility study”…a very, very preliminary type of a process that they are going through…,” said Boyd, noting that it would “require literally billions of dollars in investment,” to build a new potash mine.

The question doing the rounds is - who has that kind of money?

Profits crimped

Crimping profit margins is all set to test the market discipline of a small circle of producers that have long controlled prices for the essential crop nutrient.

Even though global potash exports fell more than 70 per cent in the first half of 2009, major producers have kept a tight rein on supply, limiting the downward momentum on pricing triggered by a sharp drop in grain prices.

Analysts say producers may start to lose their grip as existing producers expand production and as newcomers and emerging economies like China play a bigger producing role.

“The more capacity that’s out there, regardless of whether it is in the hands of the same players, (the more) the likelihood that people may break (ranks), said Morningstar analyst Ben Johnson.

Buyers have has already started to flex their muscles. Indian buyers recently pushed debt-laden Russian producer Silvinit (SILV.RTS) to cut its price to $460 a tonne from a year-ago contract price of about $625 per tonne.

Incidentally, Silvinit will follow the lead set by Belarussian Potash Co when agreeing on a deal to supply the crop nutrient to China, a source at the company said.

Silvinit will cut potash output by about 30 per cent, although production levels of the fertilizer rebounded to more than 80 per cent of capacity in July and August, thanks to a market-moving deal with India.

The Silvinit deal forced other suppliers to follow suit and brought potash spot prices down to about $500 a tonne, well below the $700 level seen when the Indian contract was signed in July, and sharply off last year’s peak of about $1,000 a tonne.

Yet that price drop has not stopped players like Potash Corp (POT.TO), Mosaic Co (MOS.N) and Uralkali (URKA.MM) from pushing ahead with multi-billion dollar expansion plans.

“From 2011 and beyond, the global supply/demand balance shows a widening potential surplus, accounting for 25 per cent of world supply in 2013,” Patrick Heffer and Michel Prud’homme, of the International Fertilizer Association, said in a recent report.

That will test the discipline of producers, who currently run their mines well below capacity rather than cut prices.

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