Potash – rapid demand growth in tight markets

Ambrian Partners has releases a new report on potash, which is a major component of fertilisers and is thus a vital commodity in the developing world. Massive population growth forecasts (35% globally over the next 40 years) put increasing pressure on the efficient use of land to provide crops for both human and livestock consumption. This will be particularly significant in areas requiring high economic growth (Asia, Africa and South America). Fundamentals support strong demand growth for potash fetiliser.

Grain inventories are low and there is pressure to increase basic food production. Where there is higher spending power there is a trend towards protein diets (thus increasing livestock feeds). There is also declining availability of arable land and the boom in biofuel also requires high crop efficiencies.

Urbanisation and population growth are competing with agriculture. There is a decreasing level of available arable land and thus more pressure for efficient usage. Historically yields are low in the developing world as fertiliser technology has not been available (or its benefits not recognised). Commercial potash deposits are not common – the majority of resources are concentrated in Saskatchewan, Canada, the Russian Urals and central Belarus. It is currently only produced in 12 countries and there are no new mines due to come into production before 2011.

A few new project areas are emerging in strategic locations for delivery to high-consumption markets. Of particular interest are the Republic of Congo (ROC), Thailand and Australia. Operators in these areas will not compete with the major companies, but will be able to help offset the approaching supply deficit and operate at relatively high margins with the benefit of strong product prices.

MagIndustries, Ambrian says, “is a standout opportunity among the developing companies. It has defined a substantial resource in the ROC which has a stable operating environment. It has recently released a feasibility study on the project, with a start-up target in 1Q11 and a strong growth strategy. The potash division will be separately listed, but the parent holding will remain part of a diversified project portfolio which has potential for early cashflow and substantial profit growth during the potash project lead time.

“Potash Corp of Saskatchewan is the market leader and is also recommended. It has a successful track record and is the only major to have significant capacity to increase production in the short term and benefit fully from the prevailing market conditions.