time to buy?

"Reap a harvest from patience

PURE SPECULATION: Robin Bromby | October 26, 2009
Article from: The Australian

FIRST, some words that normally send shivers down the spine of your average resources share buyer: think long term. Apologies if, by uttering that ugly concept, we've given anyone a nasty turn over their morning soy or skinny lattes.

The UN now puts the number of people who don't get enough to eat at 1.02 billion. At the same time, prices of the two fertiliser feedstocks -- potash and phosphate -- are in the basement. Last week Potash Corp of Saskatchewan, the world's biggest miner of that mineral, posted an 80 per cent profit fall.

Nearly half the company's mining capacity is lying idle. One of Russia's largest potash producers is working at about 60 per cent capacity.

Meantime, we're seeing increasingly dire warnings about food shortages around the world. This will be worsened by the fact that farmers in the developed world -- the US particularly -- have been cutting back on fertiliser use because of financial problems and the fact that they can't borrow money to buy it. The bottom line is that there is no way that world food production can be lifted without chemical fertilisers.

Paul Deane, rural economist for ANZ Bank, says in his latest fertiliser report that global markets for the product have been in disarray for a year. India is the only country consuming potash at anywhere near the levels of last year and has just negotiated a new import price more than 20 per cent lower than its 2008-09 contracts. He notes that China is likely to be able get a big price drop for its new import contracts.

On the subject of phosphate, the ANZ report quotes a US manufacturer saying he has seen "probably the largest contraction of fertiliser usage in 75 years". But Deane adds that lower fertiliser application is unsustainable for any significant length of time, and there is hope sales will rise for the upcoming plantings in the US of corn and soybean.

What does all this mean for the investor here? Patience, that's what. But if you have been playing the market for any length of time, just think of all the times you have muttered something along the lines of "if only I had got in earlier and at the bottom of the cycle". Well, pal, this is close to the bottom for phosphate and potash. There may be a long wait ahead. However, not only do the world's hungry need to be fed but the growing middle classes in Asia and elsewhere in the developed world are demanding better food. Chinese rural people are now eating 10 times the amount of meat they consumed just a few decades ago.

Certainly, the prospective phosphate and potash producers here are proceeding on the basis that demand and prices will rebound.

We've just seen ActivEx (AIV) exercise its option to buy the Lake Chandler potash project near the West Australian wheat belt town of Merredin.

There is already an inferred resource that would support at least 20 years' mining. ActivEx says its market studies show a ready market in Australia, substituting for foreign potash which is now imported mainly from Canada, Taiwan and Germany.

On the phosphate scene, Phosphate Australia (POZ) has lifted its inferred resource in the Northern Territory to 14 million tonnes at 20 per cent phosphate oxide. The company says its objective is to develop the Highland Plains project as Australia's lowest-cost new phosphate mine.

Also in the NT, Minemakers (MAK) is starting to bulk sample high-grade phosphate rock to send a test product to potential customers. The company's latest quarterly addresses the issue of price falls. Minemakers notes that, while the world's largest producer, Morocco, has experienced prices dropping from $US450 a tonne in mid-2008 to $US110/tonne now, fertiliser manufacturers are almost unanimous that demand will pick up.

The fall in fertiliser use will inevitably lead to a catch-up phase as farmers strive to meet demand for food.

The price cycle will take a while to pick up -- but we're almost brave enough to ring the bell for the bottom. Be warned: we plan to harp on this subject. "