March/April 2010

Voices from Industry

Potash markets — strong global economic growth projected

By A. Mulhall

As the new year dawned, the International Monetary Fund projected strong growth for key global economies.

World GDP is expected to grow 3.9 per cent in 2010, significantly above the 3.2 per cent long-term average. Economic growth in the developing world is projected to be 6.0 per cent, including a 10.0 per cent increase in China’s economic output and a 7.7 per cent rise in India’s GDP. The U.S. economy is anticipated to achieve a 2.7 per cent increase, higher than the 2.5 per cent average growth during the past decade.

These and other positive economic indicators, including supportive crop prices, point to an increase in the consumption of potash and other fertilizers this year. Farmers around the globe are working to replenish the nutrients depleted from their soils due to fertilizer application reductions during the economic crisis.

The prices for corn, soybeans and wheat, three important North American crops, are currently significantly above the previous ten-year average, providing farmers with an incentive to meet the strong global food demand. In addition, prices for several fruit and vegetable crops well above average are also encouraging farmers of these crops to boost their production.

The markets for potash, a key fertilizer for which Canada typically supplies about one-third of the global production, are reawakening following a period of cautious buying during the economic downturn.

In 2009 — during the global economic crisis — the world’s potash buyers deferred an unprecedented volume of their normal purchases, opting instead to draw down potash inventory levels in most key markets. As a result, 2009 global potash producer shipments plunged over 40 per cent.  This cautious approach by the world’s potash buyers was also followed by farmers, with potash applications around the world reduced over 20 per cent. The economic downturn led to low potash levels in both soils and retail bins around the world.

As it ratchets up potash purchases in 2010, on its path to achieving more normal application levels by 2011, the world’s entire supply chain may come under pressure to meet the anticipated escalation in demand.

The collapse of the Soviet Union in the early 1990s ushered in a lengthy period of excess global potash capacity, during which low market prices for potash failed to meet reinvestment hurdles. Potash capacity growth stagnated while a growing global population and improving diets demanded higher crop production. The additional nutrients withdrawn from the soil by these crops required on going increases in the potash consumption level.

By the middle of the last decade, the gap between global potash capacity and global potash demand had narrowed considerably and potash market prices had begun to respond to the tightening supply/demand balance.

Installation of a greenfield potash mine/mill complex producing two million tonnes per year carries a capital cost of C$2.8 billion for facilities inside the plant gate. Inclusion of capital costs for infrastructure outside the plant gate, including possible acquisition of an ore body, utilities and transportation connections and possible port operations, could increase the capital outlay to around C$4 billion. The time frame to install the new facilities and develop the mine and mill production to achieve a cash flow sufficiently large to begin paying back the capital investment is projected to be a minimum of seven years. This large investment and the lengthy delay in the payback provide a major deterrent to many companies.

PotashCorp, however, is well-positioned to bringing a large volume of new production on stream at its existing operations before needing a greenfield project.

The company owns five potash operations located in Saskatchewan, and a sixth in New Brunswick, all with excellent potential for brownfield expansions. These are able to be constructed at a cost substantially below the greenfield cost, and brought into production in a shorter time frame.

A CDN $7 billion multi-year expansion program implemented at PotashCorp is well advanced. Projects were completed on schedule at Rocanville (2005), Allan (2007), Lanigan (2008) and Patience Lake (2009). The economic downturn did not interrupt the schedule for the remaining projects, as global potash demand growth is expected to return to the trend level and continue to increase at a 3 to 4 per cent growth rate.

Additional projects are planned to be completed at Cory in 2010 (and a second in 2012), New Brunswick in 2011, Allan in 2012 and Rocanville in 2013. Completion of this program is expected to nearly double PotashCorp’s operational capability to 17.1 million pounds of product by 2015.

PotashCorp is preparing to meet the global increased need for food, and is looking forward to growing with the world.

Al Mulhall is the senior director of market research at PotashCorp.

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