Potash dynamics suggest more upheaval to come

August 17, 2010

BHP Billiton’s huge $39 billion offer for Potash Corp could be the first of several battles to control the market for the fertilizer. Demand for potash fell off a cliff in 2009. But it looks likely to recover strongly. And high entry costs favor acquisitions over digging new mines.

Potash sales in 2009 were close to 30 million tonnes, which is about half the amount sold in 2007, according to Scotia Capital. Farmers affected by a weak economy can delay application for a season or two and other fertilizers act as imperfect substitutes. But eventually plants yield less and sicken more.

Canada-based Potash Corp, the largest producer, estimates global demand this year should recover to around 50 million tonnes and rise to around 55 million tonnes in 2011. This would mean the industry would be operating at around 90 percent capacity even without taking into account the need to restock depleted inventories. Utilization figures like that should mean fat profits for producers.

Droughts, floods and other bad weather create temporary spikes in demand. But fertilizer use should also trend higher over time, driven both by population growth and by people’s tendency to eat different foods as they get richer — especially meat, which calls for lots of fertilized cattle feed. Several analysts consider China’s needs for fertilizer and imported foods critical to Potash Corp’s story, and the Middle Kingdom featured heavily in the company’s second-quarter earnings call.

The betting is hotting up on the future of agriculture in general and fertilizers and potash in particular. For interested players, it is relatively easy, cheap and fast to add capacity to produce nitrogen-based fertilizers. Phosphate-based soil enrichers are somewhat more difficult and expensive. But the mining of potassium-rich potash comes with the highest barriers to entry of the three classes of nutrients. It can take several billion dollars and seven years to build a new site.

That makes mergers and acquisitions tempting as a quicker, easier answer. Russian oligarch Suleiman Kerimov, for example, is attempting to combine Uralkali with Silvinit to create the second biggest potash producer in the world. The activity leaves the likes of Potash Corp and U.S. rival Mosaic <MOS.N> sitting pretty. And with the two companies’ shares trading far below their 2008 peaks and at multiples of about 19 and 12 times their respective estimated earnings for next year — even after news of BHP’s move sent the stocks soaring — any bidding wars could push prices in the sector higher.


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you get a double whiplash when you are a commodity producer selling to commodity producers especially when the customers can defer purchases for indefinite periods of time

this looks more like a feeding frenzy than an investment opportunity – and little ones who try to take a bite may wind up as lunch for the bigger stronger participants

Posted by dallasdave | Report as abusive

[...] Billiton’s (BHP) hostile bid for Potash (POT) may be kicking off a number of battles to control fertilizer, now that demand may recover more quickly than expected, and acquisition is cheaper than entering [...]

BHP has been after POT since just before the crisis… only able to go for it now because their Rio Tinto deal went sour and now have a big stockpile of cash/financings available. I can see this deal going to CDN$175/share without any other hostile bids or white knights. Only thing that can save POT is a merger with Agrium or Mosaic, and that probably won’t happen. Farewell POT, we barely knew you… hope govt of Canada puts some strong conditions to the deal like they did to CVRD in Inco’s takeover.

Posted by CDN_finance | Report as abusive

[...] Billiton’s (BHP) hostile bid for Potash (POT) may be kicking off a number of battles to control fertilizer, now that demand may recover more quickly than expected, and acquisition is cheaper than entering [...]