The world's biggest potash producers bet for years on ever-growing
demand for fertilizer. Now they find themselves at the mercy of small
farmers like Virender Kumar Rai.
On his patch of land in northeast India, Mr. Kumar Rai is
switching from potash to cheaper crop nutrients, like urea, for his
rice, wheat and vegetable crops. "Urea suits me fine now," he says.
For a decade through 2009, the price of potash more than
tripled on the expectation that demand for the important fertilizer
ingredient would soar as populations grew and diets improved in emerging
markets like China
and India. Large producers that dominate the industry expanded mines.
By 2015, Potash Corp. of Saskatchewan Inc., the world's second-largest
producer by volume behind Russia's Uralkali JSC, will have doubled its
capacity from 2003 levels.
They were joined by a group of small startups, along with
mining giants like Australia's BHP Billiton Ltd., that piled into the
industry. BHP initially tried to buy its way in by acquiring Potash
Corp. When the Canadian government blocked the move in 2010, it pushed
to build its own world-class mine in the Canadian province of
Saskatchewan, home to around half of the world's potash reserves.
Since 2002, global potash capacity has risen by around 30% to
about 64 million metric tons a year, according to analysts at Bank of
Nova Scotia. But demand in 2012 is expected to be 9% lower than its peak
in 2007.
The financial crisis sent global farmers looking for cheaper
alternatives. Meanwhile, much of the hoped-for emerging-market demand
never materialized. In India, one of the industry's most promising
markets just a few years ago, demand has fallen amid sharply rising
prices for what some farmers still regard as a luxury. The government
reduced subsidies of the nutrient two years ago, while a 30%
appreciation of the rupee since 2008 has made imported potash even more
expensive.
Potash is a compound of potassium, which along with nitrogen
and phosphorous is essential for plant life. It is refined from ore that
is dug out of mines, often more than a half mile below the surface. It
is sold to farmers as a powdery soil additive that strengthens plants
and makes them more resistant to disease.
Mr. Kumar Rai, the farmer in India's eastern state of Bihar,
says he now pays 2 1/2 times more for a 110-pound bag of potash than he
did a year ago.
"Prices of potash fertilizers have really skyrocketed," he
said, noting that urea, a nitrogen-based fertilizer, costs him half as
much.
The falling demand has saddled the industry with massive
overcapacity. BMO Capital Markets predicts that even if no new mines get
built or expanded, capacity will be about a fifth greater than demand
in just three years.
"You have all this capacity coming on we don't need, and yet no demand growth," said Ben Isaacson, a Scotiabank analyst.
Prices have tumbled. Potash shipped out of Vancouver, British
Columbia, is selling at around $425 a metric ton, less than half its
peak of $860 in early 2009, according to Scotiabank.
Just a handful of companies account for 66% of the world's
potash production, and they sell almost all of that through two
international marketing groups. That allows the industry to function
essentially like a cartel, similar to the exclusive diamond trade.
Still, the group hasn't been able to do much about recent
price drops. The producers recently have scrambled to reduce output.
Potash Corp. has temporarily closed four of its Canadian mines.
Uralkali said it would use only 50% of its capacity for the
first quarter of 2013. That compares to 70% capacity utilization in the
first quarter of last year and almost 100% the year before.
On Monday, Canpotex Ltd., which sells potash for the largest North American suppliers, said it reached a new supply deal with China's
Sinofert Holdings Ltd. for the first half of 2013 for $70 a metric ton
less than the last contract price established in March 2012.
This price, which is about a 15% drop, will provide a
benchmark for other contracts, including with Indian buyers who say they
also are demanding sharply lower prices.
Executives at the major potash producers say they have seen
such troughs before, and that the long-term fundamentals remain
attractive. They say that over years, using only a fertilizer like urea
can cause a chemical imbalance in the soil that will lead farmers back
to potash.
"If you look at the long-term as a whole, there is an
undeniable trend upward," Potash Chief Executive Bill Doyle said at a
recent industry conference. "It might not follow the perfectly straight
line laid out in the graph, but we expect growth will return."
Amid the uncertainty, BHP Billiton hasn't given a final
greenlight for its massive $14 billion Jansen mine in Saskatchewan. Most
analysts are betting it won't proceed.
A spokeswoman for BHP said early-stage engineering continues at the site, ahead of a board decision sometime after June 2013.
At the other end of the scale, as many as 75 startups are
struggling to raise the large amounts of capital they need to begin
mining. In December, Potash Ridge Corp., which is developing a potash
mine in Utah, raised 20 million Canadian dollars ($20.1 million) from
its initial public offering, about half of the amount originally
targeted.