ExportWise - Summer 2008 - Potash Industry Experiences Potent Growth

By Toby Herscovitch

Canada’s fastest growing export, which jumped 21 per cent in 2007, is not oil or wheat, but something that has become just as basic to our survival. It is potash and the other two key crop nutrients, nitrogen and phosphate, which are critical to the production of every staple food around the world.

The potash and fertilizer industry is on a major growth spurt with no end in sight, fueled largely by demand in booming emerging markets. Canadian fertilizer exports are expected to grow about 32 per cent this year and 13 per cent in 2009, according to EDC’s latest Global Export Forecast.

These essential crop nutrients allow farmers to produce the crops required to feed the world’s growing population and provide the inputs for biofuels. They enable common crops like rice, wheat, corn, soybeans, sugar cane, coffee and bananas to flourish.

As strong as the demand is today, potash producers say it is just starting to take off. Lately, much attention has been focused on biofuels and how they are causing a jump in food prices by diverting food to the energy market.

“Yes, biofuels have been somewhat of a catalyst for growth in global potash sales,” says Scott Rudderham, Vice-President of Operations for Canpotex, the world’s largest potash exporter, “but the real drivers are population growth, and the increasing wealth of middle class consumers in key growth markets such as India, China, Brazil and Southeast Asia.

“Improved diets and increases in the variety of foods available have created a huge demand for fertilizers like potash. About 92 per cent of Canada’s potash sales are for agricultural use and 8 per cent for industrial value-added processes.”

Canpotex is an international marketing and distribution company owned by the Saskatchewan potash producers – Agrium Inc., Potash Corporation of Saskatchewan Inc. (PotashCorp) and The Mosaic Company, a U.S. enterprise that operates some of Canada’s potash mines.

PotashCorp also owns a potash mine in New Brunswick (which operates outside the scope of Canpotex) and produces nitrogen and phosphate at facilities in the United States, Brazil and Trinidad. The company also has investments in other international potash companies.

Overall, it is the world's largest fertilizer enterprise. In late April, the company announced record first-quarter results of $566 million, compared to $198 million in the first quarter of 2007.

The other Canadian Canpotex Member, Agrium, based in Calgary, is a leading global producer of agricultural nutrients, industrial products and specialty fertilizers.

It is also a major retail supplier of agricultural products and services in both North and South America. Total sales in 2007 were USD 5.3 billion.

Canada is the world’s largest potash producer with some 32 per cent of total world production in 2007. More than 50 per cent of Saskatchewan’s potash sales are now destined for offshore markets, of which 70 per cent goes to Asia.

As potash demand skyrockets, prices too have registered unprecedented increases.

“In late March, Canpotex concluded contracts with Indian buyers at $355 per metric tonne higher than last year,” notes Rudderham.

A month later, Sinofert Holdings in China also reached an agreement with Canpotex, at a $400 per metric tonne increase over last year. PotashCorp owns 20 per cent of Sinofert, a fertilizer producer and China’s largest distributor.

Of course, prices for rice and other staple foods have been rising too, stretching out of reach of subsistence-level populations in some of the world’s lowest-income countries.

“Potash is critical to increased agricultural productivity. We go as agricultural commodity markets go. These markets are extremely tight and farmers are purchasing more potash to improve crop yields,” says Rudderham.

Adds Agrium President Mike Wilson: “If you look at potash prices on a per bushel basis, farmers are actually paying less per bushel of grain.”

Keeping pace
“World potash suppliers are being challenged to meet record demand,” says Rudderham. This was echoed by some of the top global players at a recent Global Fertilizer Conference in Toronto.

In addition to Canada’s potash giants, the participants included key competitors, companies such as Uralkali from Russia and ICL from Israel. They all see the industry running hard and fast through to 2012 and possible bottlenecks in the future. They are practically tripping over each other announcing new investments.

“Even with reports of recession in the United States, we believe the potash market will continue to be strong. The increasing value of the Canadian dollar has a negative impact on our operating costs in Canada, such as rail and terminal costs, but does not impact sales, which are in U.S. dollars,” says Rudderham.

“Costs for ocean freight, incurred in U.S. dollars, have increased by 175 per cent in the last couple of years. However, Canpotex is actively engaged in the ocean freight market and takes a proactive approach to minimize these costs.”

The biggest challenge for the potash industry, according to Agrium’s Wilson, is that governments could be pressured to intervene by imposing caps on prices and export duties on agricultural products. “We don’t really want to see crop prices go up any more, because then governments could start interfering.”

Heightened demand and prices do not all translate into net income, of course. All three Canpotex Members invest regularly in infrastructure and have indicated they are making or studying mine expansions and even new mine developments.

“Public announcements by the Saskatchewan producers show their collective production capacity (for that province) will increase by approximately six million tonnes in the next five years (2013) and eight million by 2015,” notes Rudderham.

Agrium Takes a Different Path

“We’re a different company from most other producers of crop nutrients, because we are across the whole agrifood value chain,” says Agrium’s Wilson. “We long ago embarked on a strategy to moderate the earnings cycle of any one crop nutrient by diversifying – as a wholesale producer of all three major agricultural nutrients, a significant retail supplier of agricultural products and
services, and a supplier of advanced fertilizers.”

EDC helped finance a nitrogen plant for Agrium in Argentina that has been operating successfully for close to a decade. The company also has eight other nitrogen facilities, along with two phosphate facilities, a major potash mine and specialty products manufacturing facilities in the United States and Canada.

10 years to start up
One of the biggest advantages that Canada has in the market is that it already has the infrastructure in place to bring on new capacity faster than its global competitors. By contrast, two new producers in Russia are on the horizon, but they are not expected to be up and running fully for about 10 years.

“If you are not in the business already, it is not easy to get in,” notes Wilson. Infrastructure is hugely expensive – aside from developing the mine, there are the costs of port facilities, rail lines and other major capital expenditures.

Adds PotashCorp’s Doyle: “If you try to get engineers for the process, get in line. New machines, get in line. There’s probably a four-year wait.” He also notes that good potash deposits are rare. The best ones are in very dry areas, like Saskatchewan.

Mine-to-lake and other risks
Water intrusion is one of the high-risk elements of mining potash. Every potash mine faces the threat of water inflow from underground and potash is corrosive, notes Doyle. “Russia lost a mine last year; it’s basically a lake today.”

You have to make sure you are doing regular maintenance on the mines; if you skip it in the short term, there is the risk of long-term failure, adds Doyle.

One risk that is avoidable when dealing with buyers around the globe is that of their non-payment.

“In the early 1990s, for example, our competitors were selling to Brazil on an open account basis. EDC was paramount to our growth in Brazil, and allowed us to compete with other suppliers in this market with minimal risk,” says Rudderham.

“Open account sales continued to increase and now represent approximately 70 per cent of our business. So, yes, EDC has been critical to our success. We looked at other insurance companies, but none were willing to take on risk to the same degree as EDC.”

One of the challenges that Western Canadian potash producers face is that their vast reserves are some 1,600 kilometres to tide water, separated by Canada’s rugged landscape. “So we have to anticipate the demands of the market to deliver potash to distant markets efficiently. For example, in 1999, Canpotex developed a railcar designed specifically to carry potash. By the end of this year, we will have approximately 5,500 of these railcars in dedicated potash service.

“Such investments, initiated in much leaner times, allow Canpotex to handle record potash volumes today,” says Rudderham. “We recently worked with EDC on a transaction that enabled us to lease a portion of this modern fleet of railcars at a reduced overall cost. EDC is the only one that stepped up to the plate.”

Gary Brown, EDC’s Strategic Account Executive, Extractive Sector, explains: “EDC was able to provide financing into the [third party] leasing structure, based on our knowledge and confidence in Canpotex’s strengths.”

Brown adds that EDC has been dealing with Canpotex for 30 years and the company is one of its largest clients.

By investing in the business and constantly improving productivity, Canada’s potash and fertilizer companies are “masters of their destiny” and are well positioned to help meet tomorrow’s global food needs.

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Photo: Courtesy of Canpotex

Photo: Courtesy of Agrium

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