TORONTO (miningweekly.com) – Russian potash producer Uralkali’s announcement on Tuesday that it would stop selling potash through the Belarusian Potash Company (BPC) was a significant development that would have far-reaching effects on lowering the potash price and making it more difficult for new entrants to enter the market.

Uralkali said it expected to see a significant fall in the international potash price to $300/t from the current level of about $400/t after it announced that it would stop selling potash through the BPC and that it would ramp up production.

The announcement also had a significant impact on potash producer market valuations, with the share prices of producers falling by between 15% and 20% on Tuesday, wiping out nearly $18-billion in value.

Integer Research potash analyst William Irwin said he did not believe the announcement was a significant “game changer” in the business, as the research firm had long held the view that a lower potash price was necessary to stimulate demand and discourage new entrants.

“Prices might fall in the near term, but we do not expect to see a price war. The breakup of BPC still leaves over 50% of global capacity in the hands of two marketing companies – Canpotex and Uralkali Trading – down from around 65% before the announcement, and it remains an oligopoly business,” Irwin said.

He added that the global potash industry had long avoided cost-based pricing and this remained in no producer’s financial interests. “The price only needs to drop to a level which will discourage new entrants, to have the desired effect,” he noted.

Integer Research director of fertiliser Oliver Hatfield said Uralkali had a strong interest in sending out signals that the era of $500/t potash prices was over to deter potential new entrants.

“Supply is still highly concentrated in the industry without BPC and, although prices might drop in the short term, I would expect to see a continuation of the supply discipline which has distinguished potash from other commodity industries in the medium to long term.”

COMPETITION REMOVED
However, the news that shocked the potash world was “the best thing” to happen for certain juniors, project developer Prospect Global Resources vice chairperson Chad Brownstein told Mining Weekly Online.

He said the move would result in many “marginally priced” projects and projects in weaker jurisdictions being deferred or scrapped, as the lower potash prices considerably weakened them.

“What happened on Tuesday was either a very good bluff by the cartel or a real move to break the cartel down. Either way, it bodes well for Prospect Global Resources. Only the best projects will be built,” he said in a telephonic interview.

According to Brownstein, the ‘food story’ was today more compelling than ever. A growing number of people are nowadays able to afford better lifestyles, including better diets that included meat proteins, which, in turn, pushed the demand for agricultural products and the accompanying fertilisers, including potash, higher.

He said that the world was, in an instant, made aware of the true value of potash and fertilisers, as food security becomes an increasingly hot topic for many countries.

On the other hand, one of the potential results of dismantling the cartel would be that potash becomes a true commodity with local pricing and demand characteristics, such as coal or iron-ore, which would be good for juniors.

“If a project is unable to produce at a low cost per tonne, it faces serious headwinds in the foreseeable future. In addition, Tuesday’s events would probably take away our competitors’ ability to raise capital for a while,” Brownstein said.

Prospect Global Resources recently released a prefeasibility study (PFS) for its flagship potash project in the Holbrook basin of eastern Arizona, which promised a potential net present value (NPV) of $1.4-billion and a 27% after-tax internal rate of return.

The PFS estimated the $825-million project would produce about 1.42-million tons a year at a cost of $115/t over the initial 26-year mine life. The project is located in a favourable mining jurisdiction with established infrastructure.

Brownstein said the company was fortunate to have an uncomplicated and straightforward venture, underscoring the project as being the best positioned in the low-cost-junior segment.

The company is now working towards completing a bankable feasibility study by the third quarter of 2014, with first production from the project slated for 2018.

Neighbouring Canadian project developer Passport Potash, in March, announced results of a preliminary economic assessment, which placed a $3.25-billion pretax NPV (using a 12% discount rate) on its neighbouring Holbrook Basin potash project.

Passport, at that time, said the capital cost of $1.95-billion for a 2.5-million-ton-a-year mine made this one of the best values in the potash industry.

FOOTBALL vs POTASH?
Brazilian potash developer Verde Potash CEO Cristiano Veloso on Tuesday quipped on Uralkali’s decision to exit BPC. Russian billionaire Suleiman Kerimov, who holds more than 17% of Uralkali, also owns FC Anzhi Makhachkala, the football team of his hometown in Dagestan. Since Kerimov took over FC Anzhi Makhachkala in 2011, the team had acquired numerous high-profile players from Brazil.

In an emailed statement Veloso stated: “Kerimov can rob Brazil of all of the football players that he wants for his team, but he can’t change the fact that Brazil has the desire and the ability to develop domestic sources of potash to reduce its dependence on foreign sources of supply. Our Cerrado Verde project can help Brazil to achieve this important goal”.

While this might appear flippant, Veloso and Verde Potash took potash development for Brazil seriously, as Brazil is an agricultural powerhouse, but is currently dependent on potash imports.

Being the largest global importer of potash in 2012, Brazil consumed 8.1-million tonnes of potassium chloride, of which 7.5-million tonnes, or 93%, of consumption, was imported.

The Brazilian government had stated its goal of fertiliser independence by 2020, and Verde Potash’s Cerrado Verde project, located in the heart of the Cerrado, Brazil's largest agriculture market, is expected to help achieve it.