Potash Power Play Concentrates Control

Potash Power Play Concentrates Control

Competition and concentration heat up as fertilizer giants race for control of world ag resources.

A takeover bid for the world's largest potash company earlier this year reveals an increasingly concentrated industry jockeying for control of finite resources urgently needed by the world's agricultural producers.

The boardroom battle was more evidence that agriculture's most important inputs are being developed, marketed and controlled by fewer and fewer companies in places far away from the Corn Belt.

In August Australian-based mining giant BHP Billiton launched a $40 billion hostile takeover bid for PotashCorp of Saskatchewan, the world's largest fertilizer company. Billiton planned to produce 8 million tons a year of potash on its own, while Potash Corp, the industry's biggest company, can produce 12 million tons a year.

The bid failed after the Canadian government rejected the offer, but the industry remained roiled by  prospects for other proposals to emerge:

Phosagro, Russia's largest maker of phosphate fertilizers, asked Prime Minister Vladimir Putin for permission to put together a rival bid for PotashCorp. If Phosagro buys PotashCorp, Russia would control 65% of the world's potash. "Given that Canada rejected a bid from an Anglo-Australian publicly quoted company, they are unlikely to let one involving the Russian government go ahead," says Barrie Bain, industry analyst with Fertecon, an industry tracking organization.

In Russia, a merger between major potash miners Silvinit, Belaruskali and Uralkali, is under negotiation as well. Combined, the three would control 60% to 75% of world potash reserves and 50% of world potash exports.

Before the BHP effort fell apart, China's Sinofert, that country's largest fertilizer supplier and distributor, was rumored to step in and make a rival bid for PotashCorp. Instead, the company inked a deal to purchase a million metric tons of Canadian potash each year for the next three years as China ramps up to feed its burgeoning population.

           

Real Concentration

PotashCorp is part of Canpotex, a North American export association, or cartel, that controls 40% of the world's potash exports. Canpotex includes PotashCorp, Mosaic Company and Canadian-based Agrium, Inc. Respectively these companies rank first, second and sixth in global fertilizer capacity. Canpotex will ship about $3 billion worth of potash to dozens of offshore markets this year, targeting mainly China and India.

Export associations are active in other parts of the world as well. Belarusian Potash Company, for example, is the cartel of Moscow-based Uralkali and Belaruskali of Belarus; PhosChem is the cartel for Mosaic and Potash Corp and accounts for 35% of the world's phosphate exports.

Together these three cartels control 70% of global trade in phosphorus and potassium. Seven companies - Uralkali, PotashCorp, Israel Chemicals, Mosaic, Silvinit, Belaruskali and K+S AG - control 85% of worldwide potash production.

"Potash is the most concentrated field of any of the three main nutrients needed for crop production," says Joe Dillier, a fertilizer analyst with Growmark, a North American cooperative. "Potash has had limited supply competition because for a long time there was excess mine capacity, primarily in western Canada. It costs a couple billion dollars to build a new mine, so it's extremely capital intensive."

 

Profits ahead

According to Fertecon, PotashCorp used just a third of its capacity last year as global demand collapsed.

But the outlook for demand is much brighter now. PotashCorp's Oct. 28, 2010 earnings report shows net profit of $402 million – the second highest third quarter total in company history. This result raised earnings for the first nine months of 2010 to $1.3 billion, surpassing all previous full-year totals with the exception of the company's record 2008.

In its report, the company says it believes "the fertilizer industry has passed an important inflection point and is returning to a period of powerful growth. We see parallels to the demand-driven environment that led our company to five consecutive years of record performance prior to 2009."

Because the industry is so concentrated, the sale of PotashCorp would not necessarily translate to higher production and lower prices at the farm gate, says Murray Fulton, public policy professor at University of Saskatchewan.

"You'd get some kind of response from the other companies," he says. "Full out production from a BHP buyout of PotashCorp would have meant the merger they're talking about in Russia is much more likely to happen. If somebody makes a major change, then all the dominos get reshuffled."

Increased global food demand likely means potash production expansion. Most increases in capacity through 2014 will come from established producers, says Patrick Heffer of the International Fertilizer Industry Association. Global  potash  capacity  is  forecast  to  increase from  41.6 million metric tons  in  2009  to  54.7 million metric tons  in  2014. This represents an additional 13 million metric tons of capacity, mostly in Canada and Russia. New tonnage will also emerge in Argentina, Chile, China, the Republic of Congo, Israel, Jordan and Laos.

That would be good news for farmers because it would provide more competition, adds Dillier, but it wouldn't happen over night. It takes at least three years to develop a new mine.

"There's a lot of moving parts in potash, but I would say long term, there will be more supply side competition," he adds.

 

Supply and demand at work

Supply and demand do work, even with cartels and limited competition. The U.S., for example, is typically a large exporter of phosphate, produced mainly in Florida and North Carolina. This summer domestic producers had very little inventory due to strong international sales to countries like India. Wholesalers were cautious, still feeling burned from two years ago when prices dropped from $1,200 to $300 per ton over three months.

"That inventory situation, and higher demand this fall, caused the U.S. to begin importing phosphate from Morocco, and it's arriving now through February," says Dillier. "It wasn't an immediate fix for our supply problem, but it does mean the market is working.

"Because of the extreme tightness of the market, the marketplace is responding and rather than exporting phosphate, our typical position, we are importing large amounts."

 

Take control

Global food demand will rocket as population swells to 9 billion by 2050, with poorer countries developing their economies and improving diets. New fertilizer production may come online, but in which country, and under whose political control, remains unknown. More fertilizer is consumed now in developing countries than developed countries.

The bottom line for ag producers? Start focusing on forces you can control. That starts with a new mindset toward fertilizer.  It has become the wild card in many crop budgets, and it needs a more strategic focus from most growers.

  • If possible, learn to lock in prices during seasonal dips. Fertilizer prices do appear to follow one rule of the market: Without higher grain prices they are unlikely to move sharply higher. Read the Weekly Fertilizer Review at www.farmfutures.com for trends.
  • Get serious about soil tests to be sure you're not over applying nutrients
  • Consider precision technology to make sure every nutrient goes where it's needed.
  • Look for access to manure as fertility.
  • Seek out as many bidders as possible for your fertilizer needs. Use bidding sheets to get apples-to-apples bids for your business.

An increasingly concentrated, global industry bears watching as demand for the most basic of crop ingredients soars over the next several years.

Wilson is editor of Farm Futures magazine.

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