One of the main ingredients in fertilizer, potash helps plants resist disease, thereby improving crop yields. Now, some investors think it can revitalize their portfolios…
They have some reason to, considering that demand should only rise from here.
The United Nations sees food production needs rising 70% by 2050 to feed the global population of three billion additional people. That – and the world’s rising appetite for meat – should easily boost fertilizer demand.
Also in investors’ favor, is recent history. Potash fertilizer first gained attention from 2007 to 2008 when it rocketed from $150 a ton to almost $1,000.
But when the financial crisis hit, demand dropped by almost half and prices fell nearly to its 2006 levels.
Prices have begun picking up again though, with the latest quarterly contract closing near $370 a ton. And industry executives expect potash demand to soar again by 2011, causing prices to continue higher.
Still, don’t bet on $1,000 a ton anytime soon. Current global production capacity sits at about 70 million tons, well above next year’s expected demand of 50-55 million tons.
And besides, the industry is set for a serious shake-up.
Potash industry status quo
As it stands now, the potash industry is fully consolidated, with eight companies controlling more than 80% of global supplies:
Meanwhile, two marketing groups – Canpotex and BPC – dominate global trade. They negotiate annual and quarterly contracts with big buyers such as China, the world’s largest potash consumer.
Broken down, they’re basically legal cartels, rather like OPEC in the oil market. Protected by arcane rules, they don’t have to worry about antitrust action as they regulate production to match demand and keep prices high.
But their power may be short lived if a different industry has anything to say about it…
BHP Billiton and Potash
Large mining companies such as BHP Billiton ADR (NYSE: BHP) – the sector king – and Vale ADR (NYSE: VALE) have their sights set on the industry. They want to diversify outwards while still staying within their core competencies.
Since mineral fertilizer allows them to do just that, BHP recently made a $39 billion, all-cash, $139 a share offer for the world’s largest potash producer, Potash Corporation of Saskatchewan.
That kind of interest indicates a lot of change ahead for the industry…
BHP has already indicated its willingness to break the cartels. If POT accepts its offer, Billiton could lead the potash market away from negotiated pricing much as it helped end the benchmark iron ore pricing system last year: by producing as much as possible.
Since it usually likes running its mines at full capacity, such a strategy wouldn’t hurt it. Though it would certainly hurt the cartels, as all fertilizer companies would have to compete on prices for the first time since 1972.
High-cost producers could rapidly fall out of the industry, including Intrepid Potash (NYSE: IPI), which doesn’t belong to any marketing group.
Potash white knight?
With that all said, Potash Corporation is calling BHP’s offer a “bankrupt strategy.” And it is trying to persuade other suitors to save it from such a fate.
One such potential white knight is Sinochem, the parent company of China’s largest potash importer, Sinofert Holdings (OTO: SNFRF).
China does have a vested interest in potash, and imported half of its supply from the cartels last year. But while it heavily relies on the mineral to become self-sufficient in grain production, without any sort of control, China has no real interest in such investments.
Even if Sinochem did take over Potash Corporation, it would have the same goal as BHP. And why spend billions of dollars when someone else will drive down the price just the same?
More than likely, BHP will win out. And if that happens, the potash industry will never be the same.
Disclosure: The author does not hold positions in any of the stocks mentioned
