What is Potash?
Potash refers to mineral and chemical salts that contain potassium. Potassium (K) is the seventh most abundant element in the earth's crust and is found in every cell of plants and animals and is essential for their growth. Potassium helps plants fight stress, disease and injury. It helps plants grow strong stalks in the same way that calcium gives people strong bones. Potassium, or potash, is mined from naturally occurring ore deposits that were formed when seas and oceans evaporated, many of which are covered with several thousand feet of earth. |
|
Source: Saskatchewan Mining Association
|
Global Potash Reserves
Source: USGS
The global potash industry has very high barriers to entry as it is rare to find a minable potash deposit – it’s only found in 20 regions of the world. Currently, only 12 countries produce potash, whereas it’s consumed in over 150 countries – mostly as fertilizer. Canada has the world's largest and best potash reserves, and around 95% of its reserves are found in the province of Saskatchewan. Saskatchewan is home to over 50% of global potash reserves, large enough to supply global fertilizer demand for several hundred years, and it’s the world’s best place to mine potash as its deposits are flat-lying evaporated sea beds that are relatively easy to mine. Over 65% of the world’s potash capacity is located in two regions – Saskatchewan (37%) and the FSU (30%).
Destination of Canadian Potash Sales in 2007
Source: Fertecon
Very little of the Canadian potash production is consumed at home and the majority is exported either offshore to Asia and Latin America or to the US by rail. China is now the world's largest consumer of potash, followed by the US, Brazil and then India. Saskatchewan potash has great proximity to access the US and Asian markets.
Potash - An Agriculture Commodity
Source: Saskatchewan Mining Association
In 2007, almost 95% of the world's potash production was used in the agriculture industry as fertilizer. Potash or potassium (K) is essential for plant growth and there is no substitute. Other uses of potash include livestock and poultry feed supplements and industrial products such as TV/computer screens, water softeners, soaps, perfumes, de-icers, aluminum recycling, metal electroplating, oil-well drilling mud, steel heat-treating, pharmaceuticals, ceramics, water softeners and in the chloralkali industry to produce potassium hydroxide. The main potash fertilizer product is potassium chloride (KCl), also known as muriate of potash (MOP), which contains an average nutrient content of 61% potassium oxide (K2O).
Potash Demand Drivers
Since around 95% of the world's potash production is sold as fertilizer in the agriculture industry, the main demand drivers for potash are agriculture related and are based on the demand for grains that are grown to produce food, feed, fiber and fuel. The two things that drive this are population growth and economic growth.
World Population Growth
Source: United Nations
The world's population has been growing exponentially and is currently growing at around 75 million people per year, most of which is occurring in Asia's developing countries. The growth is expected to continue until at least 2050 when over 9 billion people could inhabit the earth, an increase from 6.5 billion people in 2005. This equates to almost 40% more people to feed.
China and India Led Global Economic Growth
Source: IMF, February 2008
Global economic growth has been strong, and as has been the case for some time now, China and India have witnessed the strongest growth, which is expected to continue in 2008. Even if the US economy slowdowns or goes into a recession, the IMF still expects the global integrated economy to grow by over 4% this year.
Global Population Breakdown by Annual Income
Source: PotashCorp
Based on the world's 2006 estimated population of 6.5 billion people, approximately 82% or 5.3 billion people earn less than $3,000 per year. Of the total population, over 60% live in China, India and Southeast Asian countries. Strong economic growth in those regions provides higher personal income levels, and with the additional disposable income the first priority for these people is to improve their quality of life with more nutritious, protein rich food such as meat.
World Meat Consumption Continues to Grow
Source: FAO
A combination of increasing population and rising incomes have resulted in over 170 million tonnes per year of additional meat being consumed globally in the last 40 years, mostly in the developing world. During this time period, growth in meat consumption in developed countries has been at approximately 2% per year compared to stronger growth in developing countries of around 5-6% per year.
World Per Capita Meat Consumption by Region
Source: World Resource Institute
North America is the one of the wealthiest regions on earth, and high income levels there have allowed its population to purchase nutritious, protein rich food such as the many forms of meat. Compared to developing regions, North America consumes significantly more meat per capita - roughly five times that of Asia. As the economies in developing countries such as Asia grow and evolve, their per capita meat consumption should increase toward North American levels. The total amount of meat consumed in Asia could be very large as they have a massive population.
Meat Consumption in China
Source: Doane
Meat consumption in China is expected to more than double by 2020 to over 200 million tonnes of meat. Many more animals will be required to sustain this increased demand for meat.
Grain Consumption Per Kilogram of Meat
Source: Doane
To produce meat you have to feed animals grain - lots of grain. This is significant for the potash industry because it takes several kilograms of grain to produce just one kilogram of meat. As such, more grain will need to be grown on the world's limited amount of arable land, or land suitable for growing crops.
World Ethanol Production
Source: RFA, Earth Policy Institute
Strong demand for food is not the only factor generating a need for increased crop production, and therefore, potash, but so to is the demand for renewable fuel sources. In the past six years, it's estimated that world ethanol production, which uses crops such as corn and sugar cane as feedstock, increased threefold.
US Ethanol Production Uses Lots of Corn
Source: RFA, USDA
Corn, a very import crop in the US for food and animal feed consumption, is also the main feedstock for US ethanol production. In 2005, around 1.6 billion bushels, or 14% of the US corn crop was used in ethanol production. By 2007, 30% or 3.2 billion bushels is expected to be used for ethanol production. The USDA estimates that approximately 4.4 billion bushels of corn will be used in ethanol production by 2016. As more corn is used for ethanol production, less will be available for food and animal feed.
Declining Global Grain Inventories
Source: USDA, January 2008
Due to the increased consumption of grains for food, feed, fiber and fuel, the global grain stocks are at critically low levels as the growth in supply has not kept pace to the growth in demand. In January 2008, the USDA lowered its world grains stocks-to-use ratio for the end of the 2007/08 crop year to a record 14.7%, the lowest level in modern history. The tight supply of global grain inventories is driving up grain prices, which signaling to farmers that more grains need to be grown on the finite acreage of arable land.
Global Arable Land Per Person
Source: Doane
As the old saying goes, land is a good investment because they are not making any more of it. Not only is this true, but as the world's population grows the amount of arable land is decreasing on a per capita basis. In fact, a growing population that is becoming increasingly urbanized – requiring larger urban areas – reduces the land available for agricultural. This, coupled with the growing demand for agriculture products for food and fuel consumption, has put tremendous pressure on farmers to increase crop yields from a dwindling land base.
Fertililzer is Key to Maximizing Crop Yields
Source: PotashCorp, Morgan Stanley
Data from 157 years of long-term studies of crop production indicate that fertilizer’s, which replenish soil nutrients that were removed from the previous year’s harvest, contribution to total crop yield is in the range of 30 and 50%. The fertilizer nutrients – nitrogen (N), phosphate (P) and potassium (K) – are essential for crop growth and there are no substitute. Farmers in the develop world apply fertilizer based on scientifically recommend levels, which is currently not being done in the developing world.
Potential Potash Fertilizer Consumption
Source: Fertecon, PotashCorp
China, India and Brazil each have large developing agriculture economies and have been under applying potash for years, depleting the potassium nutrient content in their soils. For instance, based on 2005 acreage, these three countries consumed only 21 million tonnes of potash, or 42% of the scientifically recommend level equivalent to 50 million tonnes. The productive capacity of their farmland is not been fully utilized, reflecting in poor crop yields. Corn yields in China for instance are roughly 50% of that in the US and the best way for countries like China to curb food inflation and provide food security is for its farmers to apply potash. For these three developing countries to apply potash at scientific recommended levels they will need to consume an additional 29 million tonnes of potash which is equivalent to over 14 potash mines with a capacity of 2 million tonnes per year. The outlook for the growth in potash demand is great.
Potash Demand Growth
Source: Fertecon, PotashCorp
Since 1995, every year but two has had growth in potash demand. From 2001 to 2006, potash demand growth was very strong at 4.4% per year due to increased demand from markets such as China, India and Brazil. Going forward, Fertecon estimates that growth will still be strong at 3% per year, which equates to a yearly average growth of 1.7 million tonnes of product. PotashCorp feels that due to the need for crops for biofuel production, demand growth could reach 4% per year, which equates to growth of over 2 million tonnes per year or the equivalent of a new mine each year.
Global Potash Market
Supply Structure of Global Potash Market
Source: Fertecon, PotashCorp, Anglo Potash
Due to the rarity of minable potash deposits around the globe, there are very few countries that produce potash. Currently, only 12 countries produce potash, whereas it is consumed in over 150 countries. The potash industry's top 10 producers account for over 95% of global capacity and the largest producer, PotashCorp (PCS), controls over 22% of global capacity. Around 65% of the world’s potash production comes from two regions – Saskatchewan (35%) and the FSU (30%). Saskatchewan’s offshore potash sales are marketed through Canpotex, which is an export company owned by the three Saskatchewan producers. The Belarussian Potash Company (BPC) exports potash fertilizer produced by Belarus's Belaruskali and Russia's Uralkali. It is estimated that government controlled capacity in the potash industry is minimal at around 19% of total global capacity.
Aging Global Potash Capacity
Source: British Sulphur, BHP Billiton
Approximately 85% of the current global potash capacity is more than 25 years old. The last mine to be developed in Saskatchewan came into production in 1970 and the last mine to be developed globally was in the FSU in 1987.
The Potash Industry Is Now Demand Driven
Source: Fertecon, Anglo Potash
One reason why there has not been expansion in the potash industry for the last 20 years is due to the collapse of the FSU, where consumption of potash declined significantly and FSU production end-up flooding the international market. As a result, operating rates in the global potash industry fell from almost 90% in 1988 to 54% in 1993. Potash companies shut-in capacity to manage supply resulting in potash prices stabilizing throughout the 1990s. Starting in 2003 though, the potash industry has fundamentally changed from being supply managed to demand driven resulting in strong operating rates and record potash prices. The following quote by industry consultant Fertecon best describes the transformation that is occurring in potash industry:
“The potash industry appears to be undergoing a radical transformation. The industry was once characterized by stable pricing, supply management and little investment in new production capacity. These characteristics now bear little correlation to the international potash industry today. Indeed, stable pricing has given way to a remarkable run-up in potash prices to unprecedented levels. In terms of global supply, up until now we have seen producers bring on small capacity expansions or undergo debottlenecking in order to meet any upturn in demand. What has fundamentally changed in the potash market is that it is no longer a market of over-capacity and supply management. There is beginning to be huge investment not only in expanding existing available capacity but in developing completely new greenfield sites. The reason for this is that the market has become demand-driven. All surplus capacity is expected to be absorbed in the coming years to meet growing demand, and the need for new potash capacity globally is being recognized. The underlying fundamentals for this industry are incredibly strong, probably more so than any other nutrient.” (Source: Fertecon Potash Report, November 20, 2007)
Considerable Potash Price Growth Forecasted
Source: Fertecon
In April 2008, Fertecon increased its potash price forecast substantially in the wake of concluded price contracts in India and China. India was surprisingly the first to settle in March 2008 with an increase of $355 per tonne year-on-year. China followed suite in April with its price contract concluding with an increase of $400 per tonne year-on-year, equating to a FOB Vancouver price of around $575 per tonne. In addition, to these contract price increases, the spot market price continues to increase as well. On April 22, 2008, BPC announced new prices for SE Asia and Brazil at roughly $1,000 per tonne delivered. Since then, Fertecon has increased its potash price forecast as shown in the above graph. The average price between 2009 and 2020 is now expected to be $1,150 per tonne FOB Vancouver for standard grade potash. This would equate to roughly a $1,125 per tonne netback to Saskatchewan.
Economics of Greenfield Potash Mine Development Improving With Stronger Prices
Source: Fertecon, PotashCorp, Wellington West Capital Markets
As the price of potash increases, the economics of greenfield mine development continues to look more-and-more positive. The above table provides two scenarios that are based on public information. Scenario 1 is based on Fertecon's 2008 average potash price forecast and Scenario 2 is based on Fertecon's average potash price forecast between 2009 and 2020. Both scenarios use an estimated $25 per tonne for rail costs between Saskatchewan and Vancouver; an estimated cost of goods sold of $75 per tonne, which is $5 higher than what PotashCorp had in 2007; and PotashCorp's estimated new mine development cost of $2.5 billion (USD) for a 2 million tonnes of capacity ($1,250 per tonne). The estimated return on investment in either scenario is attractive and may signal the need for greenfield potash mine development.
The following is a link that also contains interesting information relating to potash:
Related Potash Websites
Back To Top
|
