Thursday 7 March 2013

China, India should invest in junior potash groups

6th Mar 2013, by Agrimoney
The purchase by an Indian fertilizer group of a stake in potash prospector Karnalyte Resources is to set a trend, with tie-ups between junior miners and cash-rich importing countries solving headaches for both sides.

The continued decline in potash prices - to some $450 a tonne in Vancouver, from $500 a tonne a year ago, on PotashCorp data – has choked off small potash groups' supply to capital by shrinking hopes for returns from investments in new mines.

Last year, shares in junior miners fell by 20-67%, compared with an 11% drop in the price of stocks in large players, such as Canada-based PotashCorp, Germany's K+S and US-based Mosaic, according to Rabobank.

Even some large mining groups are rethinking potash plans, with Brazil's Vale putting its 2.9m-tonne Kronau project in Canada on hold, and Anglo-Australian giant BHP Billiton delaying a decision on the next round of investment into its 8.0m-tonne Jansen scheme, also in Canada.

'Oligopolistic supply structure'

However, this drop in potash prices has, ironically, been only a mixed blessing to buyers too.

While lowering bills for now - as highlighted by recent import orders signed by China and India, the top two potash-importing countries – the hurdles to fresh mines look set to reassert the hold on the market of the Canpotex and BPC marketing cartels, whose members include the likes of PotashCorp.

"The weaker prospects for new players entering the market certainly raise the changes of the oligopolistic supply structure surviving in the long term," Rabobank analyst Rakhi Sehrawat said,

"This does not bode well for large potash importers as they will eventually be left in a position of price-taker when global potash demand recovers."

With potash demand growth of 3% putting that recovery on the cards "in the medium term", the "tightly-balanced outlook prompts the question whether larger importers of potash, such as India, will ever get respite from the controlled supply structure."

Good for both sides

The solution, Rabobank said, was for importing countries to engage a long-term focus and invest in junior miners – providing the capital to get greenfield projects running, and reducing their vulnerability to the whims of the large groups.

"To secure long-term supply at a reasonable price, it has become imperative for large potash importers to facilitate supply development… by pumping in financing, entering supply contract agreements, or acquiring existing mines," Ms Sehrawat said.

With the big importers of BRazil, China and India set to rely 30% more on foreign purchases by 2020, totalling some 23m tonnes, "this puts the spotlight on these importers to re-evaluate their long-term position.

"In order to increase their 'walk away' factor in futures negotiations [with potash cartels] and put a cap on potash prices, importers need to build a more balanced potash supply mix."

Already started?

The comments follow Karnalyte Resources' announcement in January that it had sold a 20% stake in its Canadian potash mining project to India's Gujarat State Fertilizers and Chemicals, which also negotiated an offtake agreement of 350,000 tonnes a year.

Karnalyte revealed earlier this week that a second potash buyer is close to making a similar deal.

Meanwhile, Chinese investors are backing projects in the nascent producing country of Laos

And China's Sichuan Chemical Industry Holding Group has signed a $2bn supply deal with US-based potash exploration group Prospect Global Resources to take 500,000 tonnes of potash a year fir a decade.

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