(Lifted off SH)
FT 01.06.22
War and food crisis fears spur dash for potash
With sanctions upending trade flows and supply security taking on growing importance, producers aim to boost output
NEIL HUME AND EMIKO TERAZONO LONDON MICHAEL POOLER — SAO PAULO
For the best part of a decade the potash market struggled with overcapacity and low prices.
But as sanctions throttle supplies of the fertiliser from Russia and Belarus, which account for almost 40 per cent of supply, buyers are scrambling for cargoes and warnings are growing of a food crisis.
In agricultural powerhouse Brazil, prices have risen 185 per cent over the past year, hitting records above $1,100 a tonne, according to commodities consultancy CRU. In Europe, they are up 240 per cent to €875 a tonne.
Mined from underground deposits formed during the evaporation of ancient seabeds, potash is a mineral rich in water-soluble potassium, one of the three essential nutrients required for crop growth. Crucial to the production of food staples such as corn, soy, rice and wheat, a plunge in supply threatens to devastate crop yields.
Producers are looking to capitalise on the surge in potash prices and geopolitical tensions that have upended traditional trade flows and highlighted the importance of security of supply.
BHP is weighing whether to bring forward production from Jansen, a $5.7bn project in the western Canadian province of Saskatchewan, to 2026 rather than 2027.
The world’s biggest miner has also started studies on a second-phase expansion of the project to double potash production to 8mn tonnes a year.
“The tragic events of recent months have highlighted the higher than usual potential for supply-side disruption in this market,” Mike Henry, BHP chief executive, said last month. “This has positively reinforced the decision we’ve taken to enter potash.”
Backers of a delayed $2.5bn potash mine in the Amazon rainforest that would be the largest in the region have renewed a push for authorisation. To obtain the necessary environmental licences, Brazil Potash must consult indigenous people.
“Subject to securing the required funding, the company will then start construction ideally at this year end,” said Matt Simpson, chief executive of the company, which is owned by Forbes & Manhattan, aTorontobased merchant bank. “Assuming construction starts at this year end, potash production could commence three to four years later.”
Smaller exploration companies, meanwhile, are raising money to start or complete new projects in politically stable jurisdictions.
Highfield Resources, an Australian-listed company that plans to start to develop a potash project in Spain this year, is close to securing a €312.5mn financing package from a consortium of European banks and has started talks with potential strategic partners.
“We’ve seen a huge difference in the level of interest since the war Ukraine,” said Ignacio Salazar, chief executive.
On the other side of the Atlantic, Canada’s Western Potash has just secured a C$85mn loan from Appian Capital, a London-based private group, to fund development of its Milestone project in Saskatchewan, while shares in Aim-listed Emmerson, which owns the Khemisset project in Morocco, have risen 30 per cent this year.
“If you’re an exploration development company at the moment, you’re spending every cent you can get your hands on touring around Wall Street and Toronto and London, trying to talk to hedge funds and private equity and others, trying to raise money,” said Allan Pickett, head of fertiliser analysis at IHS Markit.
The surge in potash prices is mainly a result of Belarus not being able to find a way into international markets because of EU and US sanctions and after neighbouring Lithuania blocked access to its railways and ports.
Belarus is selling about 5 per cent of its normal volumes, mostly to China, although it was likely to work out a way to gain access to Russia’s Baltic ports, according to Pickett.
“There are countries that will not necessarily be squeamish about buying from Belarus, at which point there is [volume] bounceback in the market and pricing comes down and a lot of heat disappears,” he said.
But while the potash market has a history of boom and bust dating back to the 1960s, analysts and industry executives believe that even if prices cool, they will remain above the long-term average.
At a conference, Germany’s K+S said a floor price of $500 a tonne was possible — half the current spot price but double the average price of the previous decade.
In a presentation published last year, BHP forecast “future achievable” potash production of 86mn tonnes in 2030, up from 76mn tonnes in 2020. Now, however, analysts reckon that such an estimate will be hard to achieve because most of the new supply was expected to come from Russian and Belarus.
“If those projects are delayed or even cancelled outright because of issues around access financing, then maybe you can see a situation where supply is certainly tighter for a more prolonged period,” said Humphrey Knight, head of potash analysis at CRU.
Slavkaliy, the Belarusian group, was forced to suspend development of its 2mn-tonnes-a-year Nezhinsky mine because of difficulties obtaining a loan. Analysts say there are also doubts over the funding of Talitsky, a project being developed by Acron of Russia.
Projects such as Highfield’s Muga are relatively small scale so not big enough to make a difference globally, although they could help balance regional supply and demand.
“Europe is realising it needs to be self-sufficient and is starting to look at projects”, said Salazar, who believes Muga could eventually produce 1mn tonnes a year of potash, equivalent to a third of the volume Europe imports from Russia and Belarus.
The war in Ukraine has underlined the importance of self-sufficiency for Brazil, the largest buyer of fertilisers which relies on imports for about 85 per cent of its needs.
Verde Agritech, a Toronto-listed Brazilian maker of potassium-based fertiliser, has announced that it will increase production.
Jair Bolsonaro, Brazil’s president, meanwhile, has pushed for indigenous territories in the Amazon rainforest to be opened up for potash mining, to the consternation of environmentalists.
Knight says that the current crisis makes it easier to understand why BHP is bullish about Jansen, which could eventually produce 16mn-17mn tonnes of potash a year across all four stages of development.
“But there are lots of risks around the market outlook . . . the principal one being that Russian and Belarus are unlikely to be out of the market for ever,” he said. “This is one thing that could change very quickly.”
It will be difficult to replace Russian and Belarusian supply in the short term, particularly given that most of the attractive potash deposits were already developed during the China-driven commodities boom of the early 2000s.
“Supply will respond to high prices. It happened in the supercycle, and that’s why the market was depressed for such a long time,” said Huw McKay, BHP chief economist.
“But if demand grows, the hangover eventually passes. That’s where we are now, at the start of a new cycle but without many attractive options in the industry’s collective hopper,” he added. |
