CRU’s Burnside warns of potash overcapacity and oversupply

8th March 2013 By: Simon Rees - Creamer Media Correspondent

TORONTO (miningweekly.com) – Canada’s potash sector is a leviathan in the nation’s mining industry; it accounted for almost 30% of global supply during 2011, with the value of production that year reaching $7.97-billion, according to the Mining Association of Canada. The province of Saskatchewan produces almost all of this key raw material for fertilisers.

However, there is cause for concern about potash oversupply stemming from significant brownfield expansion plans and potential greenfield developments coming on stream.

At Prospectors and Developers Association of Canada’s 2013 show, CRU International’s manager of fertiliser analysis products, Paul Burnside, highlighted several critical fault lines within an overarching industry talk. He considered both junior and major potash projects, and then examined oversupply and the effect this may have.

“With the potash industry, the level of consolidation in the market is notable; around 80% of production comes from the top dozen producers,” Burnside said, before highlighting the cost of developing a major potash project and the inevitable drag this has on lead times.

“Potash mines are generally underground mines […] For a mining and processing complex, you’re looking at billions of dollars [of capital expenditure] rather than millions,” he said. “Development time of underground mines takes longer, of course, with around seven years needed from exploration to production.”

The advantages of Saskatchewan were clear, but so too were its drawbacks: most notably its position in central Canada. This has spurred the interest in projects with easier access to the main markets.

“From a geological point of view it doesn’t get much better than Saskatchewan’s deposits, which are high-grade, thick and uniform,” he said. “[They’re] amenable to high productivity and low-cost mining.”

“However, the province is not particularly well located, which is why others are looking at deposits that might not be so good geologically [but] are located much closer to the end user. For example, the junior projects with a focus on the Congo and East Africa; the Congo looks towards Brazil, while East Africa looks to India and Southeast Asia,” he added.

But the disadvantages of these plays are also apparent. “There are a lot of cons when it comes to projects outside the main [potash] areas: poorer-quality material, political instability and the lack of infrastructure,” he said.

Considering potash’s price outlook, Burnside was relatively bullish. “We’ve still got three quarters of world capacity under $200/t in terms of production costs, while prices are around $400/t, plus CFR [cost and freight],” he said.

But potash-based fertiliser’s appeal continues to face competition from its nitrogen-based counterpart. “Since the 1960s, we’ve seen nitrogen consumption rates grow much faster than potash and phosphate. In the late 1990s and early 2000s it looked like nitrogen use was diminishing and, as a result, more potash and phosphate [was sold instead], rebalancing the nutrient ratio. But that reversal seems to have evaporated in the past few years,” he said.

“Much of this is down to the price of potash and phosphate rising, which means farmers stick with nitrogen. This has a more immediate effect on their yields. So yet again nitrogen outstrips potash and phosphate,” he explained.

LOOMING OVERSUPPLY

Burnside then considered the big names now circling the potash market. “This includes fertiliser names, such as K+S, which is building a potash project [Legacy] in Saskatchewan, while the large miners are involved too, such as Vale and BHP Billiton.”

“The Vale project in Argentina [Rio Colorado] was suspended in December. The investment environment is pretty risky in Argentina at the moment; in this era of austerity, I think Vale is looking to share the cost and the risk of that project before it recommences [development work],” he said.

“BHP Billiton, which has already ploughed over $1-billion into its [Jansen] project in Saskatchewan, is potentially building the world’s biggest potash mine. But despite all the money committed so far, it is still awaiting full approval to go ahead. A decision is scheduled to be made by the middle of the year,” he added.

When these projects eventually come on stream the result will be overcapacity and oversupply, he said.

“We’re in the middle of a large supply-side response to the price estimations of 2006/08. Even without BHP Billiton or Vale factored into our forecasts, we’re already looking at a capacity surplus,” he warned.

“Take relatively bullish expectations over the next few years, the ones above the long-term trended growth, and it’s likely we’ll still see significant oversupply in the market. How bad it will be depends on the amount of greenfield capacity that eventually comes on stream,” he stressed.

Burnside considered the effect on prices. He could even foresee a “move down towards the short-run marginal costs, simply because of the number of players and the amount of capacity”.

“[Remember] demand in 2012 was no higher than in 2004. We’ve seen demand growth squeezed out of the market by suppliers testing price elasticity and taking advantage in any pick-up in demand to push up prices,” he said.

Hope for the sector lay producers drawing back from this methodology and taking advantage of lowering costs. “If that stops, and [when combined] with an ease in operating rates, then there should be some return to demand growth.”

Longer term, the world’s growing population will buoy the market and Burnside stressed this during his presentation. “The world’s population continues to rise, with the UN forecasting 9.2-billion people by 2050. And it’s not just about more mouths to feed; diets are changing too. As people become more affluent, they eat more premium goods, such as fruits and vegetables that require more fertilisation. They are also consuming more meat, which requires more feed in terms of grains.

“In the long term, this is bullish.”