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BHP Billiton (TIM WIMBORNE/Tim Wimborne/Reuters)
BHP Billiton (TIM WIMBORNE/Tim Wimborne/Reuters)

Mining giants look to future of fertilizer Add to ...

The blockbuster bid for Potash Corp. has set the stage for a round of deal-making as the world's mining giants look to take hold of an industry primed for substantial growth.

The move by BHP Billiton Ltd. comes as other major international companies, including Vale and Rio Tinto, have nurtured a similar hunger for fertilizer, which presents a chance to profit from a world where food demands are expected to soar alongside a growing population.

Potash Corp., the top global fertilizer player, is just one of a small group of companies with substantial holdings in the production of potash, phosphate and nitrogen, the three key global crop inputs.

The potential firepower in those holdings shot into the public spotlight light two years ago, when potash prices roared to nearly $1,000 (U.S.) a tonne and Potash briefly became the top publicly traded company in Canada.

Now many believe Potash will join competitors like Mosaic Co. and Intrepid Potash Inc. as the target of growth-starved internationals.

"What is clear from this is that the potash industry is going to be consolidated by the mining industry," Paul Cliff, an analyst at Nomura Holdings Inc. in London, told Bloomberg News. "And that may happen a lot quicker than most people thought."

The buying has already begun. Earlier this year, BHP bought Saskatoon-based Athabasca Potash Inc. for $341-million. In May, Vale announced it had spent $4.7-billion (U.S.) for a series of South American fertilizer assets, including a majority ownership position in Fertilizantes Fosfatados SA.

Russian companies, too, are pushing for consolidation, including a bid by phosphate-maker OAO PhosAgro to merge with a potash producer.



"If you are an outside producer and you want to get in, the easiest way to get in is by taking over one of the existing players," Edlain Rodriguez, a New York-based analyst at Gleacher & Co., told Bloomberg Television.

"Companies like Potash, Mosaic, which have the scale, are the most attractive assets out there."

What's at stake is a potential position in an expected food revolution. Despite a dismal past year, when prices dropped to $350 (U.S.) per tonne, world demand fell 20 per cent and 30 per cent of North American capacity was idled, potash now looks set to soar again. Rising wheat and corn prices are propelling demand as farmers see new incentives to apply more fertilizer, in hopes of boosting lucrative crop yields.

The International Fertilizer Association predicts potash alone will see an 18-per-cent recovery in the 2010-2011 crop year, bringing it back within striking distance of the huge volumes purchased in 2008.

With more modest demand expected for the other two main fertilizer ingredients, nitrogen and phosphate, the outlook is especially good for potash - and for Potash Corp., which draws a third of its net sales, but fully 71 per cent of its gross margin, from the commodity.

And while the short-term recovery could still be hampered by ongoing economic malaise, fertilizer makers have long argued that the true opportunity lies in coming decades. Last October, the United Nations declared that global food production will have to double by 2050 to feed a growing world. Meeting that demand will require enormous new volumes of fertilizers.

More recent stories on potash

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Better yet for companies such as Potash Corp., both China and India are expected to need far more potash in the future. According to Washington, D.C.-based The Fertilizer Institute, both countries currently use half as much potash in their field mix as U.S. farmers.

"They have a long way to go to get their potash ratios to where they should be," said Harry Vroomen, the institute's vice-president of economic services.

There are, however, reasons for caution. Predictions of surging demand have already driven substantial moves to increase fertilizer extraction. The U.S. Geological Survey has forecast a greater than 25-per-cent increase in global potash production capacity by 2013.

And potash is not a rare substance. The world has enough potash reserves to produce at 2008's sky-high levels for nearly 250 years.

Yet industry observers say what makes potash potentially lucrative is not the quantity of what's available, but its global distribution.

"It's not like oil, which is fairly ubiquitous," said Stephen Halabura, president of Saskatoon-based North Rim Exploration Ltd., a leading North American potash consultant. "Potash is very, very concentrated."

Three-quarters of global potash exports come from Canada, Russia and Belarus, where the vast majority of product is controlled by just two groups: Canada's Canpotex, a joint export marketing organization, and the Belarussian Potash Co., which functions in a similar fashion.



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