Market forces to buffet potash – by Ryan W. Lijdsman (National Post – December 22, 2011)

The National Post is Canada’s second largest national paper.

Ryan W. Lijdsman is an international business consultant and freelance writer who has been working with various companies and governments in the Middle East and Eastern Europe.

While BHP Billiton failed in its attempt to take over Potash Corp., it is succeeding in transforming the Canadian potash industry from supply management to free market. BHP and other new entrants are opening new potash mines that will sell directly to buyers, bypassing Canpotex. Over the long term, this transformation will be positive for both the industry and the governments that receive royalties, but in the short term the proposed supply increases are far greater than current demand, leading to market volatility as the forces of supply and demand clash.

Canadian potash has traditionally been exported through Canpotex, a producer-owned export cartel made up of Potash Corp., Mosaic and Agrium. Canpotex manages the price and volume of exports and with the other large global exporter Belarusian Potash Co. – a consortium that controls the exports of Belarusian and Russian potash – controls 70% of the export market.

The supply management that Canpotex provided producers has benefited the industry by providing stability when supply was greater than demand. But it has not provided a fair pricing regime for consumers or allowed the market to function efficiently due to the lack of competition. The only way to increase competition is by transforming the industry into a free market and letting the market decide the price and volume at which potash will be sold.

The current exploration boom is being driven by estimated long-term fertilizer growth of 3% to 4% per year, which equates to almost two million additional tons of potash demanded each year. BHP Billiton is planning to start production at its Janzen site in 2015, a potential eight million tonne per year mine; Vale is planning a $3-billion investment; Rio Tinto has a joint venture with North Atlantic Potash Inc., and K+S Ag has plans to start production by 2023 at a three million tonne per year plant. If all proposed projects go forward Canadian potash production will more than double at a time when the world is in economic crisis and growth in India, Brazil and China, has been downgraded.

Most analysts believe that by 2020 potash demand will exceed the industry’s ability to expand supply capacity. This is based on three factors: that price can be increased without altering demand, that developing countries will see population growth and less underutilization of commercial fertilizers, and that production will decline in many of the existing potash mines.

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