time is right for bhp's canadian potash plunge

Robin Bromby From: The Australian August 19, 2010 12:00AM

MARIUS Kloppers' decision to put his leadership on the line may have come down to a stark choice: leap now, or be left behind. Two factors are in play in BHP Billiton's bold bid for acquisition in the fertiliser sector.

First, more big players are moving into what is a tightly controlled industry. Second, demand is set to rebound as farmers need to redress two years of soil depletion.

Potash -- which contains the potassium needed for fertilisers -- is a market that is concentrated in a few hands. Canadian, Russian and Belarus producers account for 70 per cent of world supply. But the industry is starting to fracture as aggressive smaller companies try to get a foothold.

By taking control of Potash Corp of Saskatchewan, in addition to its earlier acquisitions of Anglo Potash and Athabasca Potash, the BHP chief will have a hand in this market, and be able to start calling some shots.

BHP's existing Canadian potash projects are within 20km of Potash Corp's Lanigan and Allan mines and could also provide potential cost and operating savings by combining operations. Kloppers would importantly also gain immediate access to marketing company Canpotex, of which Potash owns 54 per cent.

Only 12 countries produce significant quantities of potash, and Canada accounts for 35 per cent of global output, followed by Russia at 19 per cent, Belarus 16 per cent, while Israel has 10 per cent. Canada's potential is shown by its having 53 per cent of the world's known potash resources.

The BHP news saw local investors taking a big shine to junior potash explorers yesterday, even though most are at very early stages of production.

The most advanced local explorer is Reward Minerals, with a 20.5 million tonne resource at its Lake Mackay project in the Gibson Desert, which straddles the Western Australia-Northern Territory border. Reward is also in a joint venture on another project with Rum Jungle Uranium.

Other potash stocks that fared well were South Boulder Mines (exploring in Eritrea), Transit Holdings (exploring in Utah), Red Metal (Colorado), Elemental Minerals (Republic of Congo) and Orecobre (with an advanced lithium-potash project in Argentina). On the demand side, all the expectations are that fertiliser sales are poised to rise. These sales plummeted when the global financial crisis hit, due to falling crop receipts and the inability of farmers to get loans to buy fertilisers. But that cannot go on. As Scotiabank of Canada noted in a recent review of potash, since the GFC hit farmers around the world have "mined" nutrients from the soil. Now they have to put them back if crop yields are to be maintained.

The world population is growing, developing countries are changing their diets because people can afford more expensive food (China's meat consumption has tripled since 1990), but the amount of arable land is shrinking due to urbanisation and other factors.

The biggest potash importers are China, India, the US and Brazil. But it is not just the demand for food that will drive crop production and fertiliser demand. Increasing amounts of sugar cane, corn, palm oil and soybeans are now used in biofuels.

In the period January-April, Brazilian imports of potash rose 720 per cent year on year and China's by 36.7 per cent. Meanwhile, prices seem to have established a new base. Potash fetched under $US200 a tonne between 2000 and 2007. Then in 2008 it rose to over $US800/tonne, briefly peaking close to $US1000.

No one expects it to hit those heady heights again, but there is no chance they will sink back to pre-2007 levels. The spot price in June was $US347/tonne.

One factor that has kept a lid on prices this year was a deal in January in which China locked in contracts to buy at $US350/tonne from Belarusian Potash and at $US355/tonne from Israeli Chemicals -- deals severely criticised by Potash Corp CEO William Doyle.

But, while the market is now dominated by a small number of large players, there is a growing contingent of Canadian and Australian explorers who threaten to offer buyers greater choice of supply in the future. One Canadian company, for example, recently reported a 1.7 billion tonne resource in the Republic of Congo.

Analysts don't expect much of a bidding war for Potash. Rio Tinto exited its potash assets in 2009, while Vale is concentrating on its Brazilian potash projects, while agribusiness rivals such as Mosaic simply don't have the firepower to compete.

http://www.theaustralian.com.au/business/time-is-right-for-bhps-canadian-potash-plunge/story-e6frg8zx-1225907023612