We are on the precipice of a food fight among 7 billion people, and potash
will be right at the center of it.
If you can add 200,000 people every day to the global population and
account for a significant loss of farmland at the same time, you can begin to
understand the dire food situation facing the planet. This is why potash is
so important: It's the fundamental element that everyone takes for granted,
despite the fact that a projected 7.7 billion lives will depend upon it by
2020.
No commodity is more fundamental than potash -- and there is a lot of
pressure riding on an element that many people aren't even familiar with. Of
the key commodities taken for granted, potash is on the top of the list.
The challenge for farmers -- and for the world -- is to increase crop
yields on less land, which is being lost to climate change and increasing
urbanization. This means not only steady demand for the three main elements
of fertilizer -- potash, phosphate and nitrogen -- but significantly higher
demand.
"A growing population needing to be fed from a limited amount of
arable land makes fertilizer and particularly potash a robust
commodity," Potash
Ridge President and CEO Guy Bentinck told Oilprice.com.
"Additionally, as the middle class grows, the demand for higher-end food
increases, and with that the demand for potash and related fertilizers
increases."
For such a critical element, it's hard to believe that potash remains so
elusive. It took a high-profile US$40-billion hostile takeover attempt of
Saskatchewan's Potash Corp., which failed, by major miner BHP Billiton in
2010 for even the Wall Street Journal to decide to figure out what all the
fuss was about.
Potash, and various potassium-containing compounds are used to fertilize
crops as a necessary resource for the growth of plants. In many regions of
the world, there are large potash-bearing deposits from ancient sea beds that
dried up millions of years ago. Most potash comes from these sources and is
separated from the salt and other minerals and then graded into a form that
can be used to make fertilizer.
So even if you haven't heard of it, Potash is so big that it eludes radar
-- until the giant miners start aggressively positioning themselves for
bigger pieces of this pie.
If you're still not sold on potash, consider this: As far as commodities
go, though it's been a tough couple of years, Potash outperformed gold,
silver, copper and oil and gas in 2015, and this year, as its cycle comes
full circle, it's back by popular demand.
The Potash Playing Field
This is a huge playing field with some of the biggest miners in the world
-- all vying for market share.
Russia, Belarus, China, Germany, the U.S., Israel, Jordan and China are
all major potash miners, with Canada currently holding the top position for
the commodity--producing 11 million tons last year and the year before,
compared to Number 2 producer Russia's 7.4 million tons.
Canada is also home to the world's largest fertilizer company by capacity
-- Potash Corporation of Saskatchewan, or Potash Corp. -- the target of BHP
Billiton's long-running covetousness.
The U.S. came in at 770,000 tons of potash production in 2015, mostly from
New Mexico and Utah, which have a total of seven potash mines. Most of the
U.S. potash goes to the fertilizer industry, while small amounts are diverted
to the chemical industry. The four mines in New Mexico are controlled by two
companies -- Intrepid Potash (NYSE:IPI) and Mosaic (NYSE:MOS). In Utah, it's
Intrepid again, Compass Minerals (NYSE:CMP), and Canadian explorer Potash
Ridge (TSX:PRK) with its Blawn Mountain project. Potash Ridge's Valleyfield
project in Quebec is projected to produce 40,000 tons of SOP (sulfate of
potash) annually, with construction slated to begin later this summer.
The movements among the big potash players make huge market ripples. In
2015, a US$500-million loan deal from the Industrial and Commercial Bank of
China and China Construction Bank with Russian potash major Uralkali,
effectively gave China greater control over global potash production.
Uralkali accounts for about 20 percent of the world's potash production.
China -- a major demand center for potash -- now has immense influence in
the potash market, and is both a major producer and a major importer because
demand is far greater than domestic supply. The Chinese potash contracts that
are typically made in February every year -- but delayed this year -- are a
critical annual point for producers.
Not all Potash is Equal: Some Potash is Posh
As Mr Bentinck has noted above, the middle class is growing, and they want
higher-quality, healthier food, which means cash crops. This demographic
change is leading to a health food revolution for which potash is the primary
element. But not all fertilizers are equal in this game.
The two most common forms of fertilizer are MOP (muriate of potash) and
SOP (sulfate of potash). Right now, MOP is the most common; but while it's
good for some crops, it's not good for others, and it can create environments
that are detrimental to some crops, primarily due to high levels of chloride.
SOP, on the other hand, is the premium end of potash. It's the posh
potash. It improves both the quality and yield of a crop, while at the same
time making them more drought, frost, insect and disease-resistant. It's been
said that SOP also improves the taste of the food by improving its ability to
absorb nutrients.
The other problem with MOP today is that the market is temporarily
over-supplied and prices have dropped, which has prompted some more junior
miners -- such as Potash Ridge in Quebec and Utah--to swoop in to take
advantage of the opportunity for the less common SOP. Potash Ridge, which is
one of the fastest-growing juniors on the posh potash scene, says SOP
"continues to be one of the best performing commodities across all
sectors, which realized prices in North America exceeding US$880 per ton in
the fourth quarter of 2015."
Riding the Cycles: The Potash Catalysts Are Already Visible
Fertilizer demand is set to increase over the long-term. While globally we
consumed 35.5 million tons of potash in 2015, the next four years should see
this rise to 39.5 million tons.
The catalysts for potash are already clear and present. The grain cycles
that affect fertilizer are coming back around now; the long overdue, but now
occurring monsoon season in India should relieve several quarters of slumping
demand in this major demand venue; a health food boom is increasing demand
for the SOP form of potash; long-term global population figures stand starkly
against plummeting farmland figures; and major potash production is coming
offline in the near-term, making even more room for the juniors to break in.
Remember -- grain crops are cyclical, so buying when they are down is when
the big investors make all their money. Just because corn and other key crops
that rely on potash have been down, adversely affecting fertilizer revenues
-- doesn't mean they're out. Corn has many booms and busts; buy on the bust,
right before the next cycle boom.
One of the biggest immediate-term catalysts will be the planned moves by
giant Potash Corp., it's Canadian competitor Agrium (NYSE:AGU) and Mosaic to
take potash production offline in order to rebalance the supply side of the
market -- something everyone's been trying to get OPEC to do with oil to no
avail. This means that in the next few months we should see potash prices
recover, so the window to get in on the downside here is only open a crack.
The last great cycle for potash was 2004-2008, but prices for MOP have
dropped 60 percent since then, while prices for SOP have doubled since then.
Image Source : https://oilprice.com/images/tinymce/2016/Pash1.jpg
While MOP is experiencing a glut right now that could soon be rebalanced, supply
for SOP is tight, making the margins for SOP increasingly attractive, and
the juniors breaking into a high-reward versus risk bargain.
"The global SOP market appears to be under-supplied, with current
tightness of the market demonstrating demand for additional global capacity
outside China," according to Neil Fleishman, Director of Research for
Green Markets.
To Re-Cap: This is Why We Like Potash
There is massive opportunity here in the uncertainty of this market, for
which the fundamentals absolutely must re-balance in the medium-term.
And while the MOP fundamentals might take a bit longer to fully rebalance
as the global supply-demand picture recovers, the premium-priced posh potash,
SOP, is the emerging darling that gives us cause to look more bullishly at
the break-out juniors here.
