Rabobank Report: Impending Uneconomics of the Potash Market

Outlook is Substantial Overcapacity, Between 59% and 100% of Demand

NEW YORK, June 26, 2012 /CNW/ - A new report authored by Rabobank's global Food & Agribusiness Research and Advisory group looks at the global potash market and scenarios for change through 2020. The "Playing the Potash Field" report predicts that, while the potash outlook will depend on several key variables, regardless, there will be substantial overcapacity, ranging between 59 per cent and 100 per cent of demand.

Key Points of the Report

In light of the ongoing supply side developments from new players, the existing big players that form the two potash consortiums – Canpotex and BPC – will not sit back and watch. This is a key swing factor in the market towards 2020 as these players have the scale and market access to discourage most of the Greenfield investments. However, if the geopolitical motives of the major importers overrule the pure economic parameters, it will become very difficult to maintain the oligopolistic profits in the industry.

Of the key influencing variables, the first issue is the extent to which Brazil, India and China – which collectively were responsible for 40 per cent of total potash imports in 2011 – are prepared to endure uneconomic projects for the sake of securing supplies either domestically or by investing in overseas developments.

"In the end, it is mainly geopolitical and long-term strategic security parameters that justify such investments," said Rabobank analyst Dirk Jan Kennes. "From a pure economics angle, many of these investments might render losses if prices come under pressure due to oversupply."

The second factor is the ability of producers to secure financing. This is not a problem for the mining giants but it could affect the prospects of projects by smaller companies, many of which will struggle to secure financing for capital expenditure of at least US$1,000 per tonne of capacity.

"Finally, the response of established players to new entrants could also affect the arrival of new entrants. More than 60 new projects have been announced, but the existing producers have low production costs and the ability to increase their own output, which could reduce prices to a level that makes new production uneconomic," co-author Rakhi Sehrawat added.

Background information on potash:

Potash is one of the crucial ingredients of the world economy, thanks to its central role in the production of fertiliser and thus in food production, but it was little known outside the commodities world until 2007, when the price of agricultural commodities boomed, sparking fears over food security and highlighting the dominance of the market by two supply consortiums, Belarus's BPC and Canadian group Canpotex.

The average price of the commodity rose from US$140 per ton in the period 2001-2006 to an average US$420 per ton from 2007 to 2011, with the two consortiums able to dictate prices thanks to their control of the market, high barriers to entry and a long lead time for new projects.

Potash hit the headlines again in 2010, when BHP Billiton launched and then had to abandon a hostile takeover of Canada's Potash Corporation, one of the members of Canpotex, after the Canadian government blocked the deal.

However, the current situation of high prices and restricted supplies is set to be turned on its head in the next few years, thanks to some of the world's biggest mining companies – attracted by the high margins – and the governments of the world's largest emerging economies, which were alarmed at their dependence on two suppliers.

Potash projects have been announced in Africa, South America, North America and Russia, with the deep-pocketed mining giants BHP Billiton, Vale and Rio Tinto leading the way and well able to afford the capital outlays. This raises the possibility of falling potash prices that could bring some relief to consumers who have suffered sharp rises in the price of food in recent years.

It is likely that the top importing countries – China, Brazil and India – will tolerate and indeed contribute to overcapacity because of their desire to become more self-sufficient in the mineral. This will bring prices down and reduce the influence of the two dominant players.

In Rabobank's base case scenario, Brazil and China both increase production at home and invest in projects overseas to become almost self-sufficient, while India, in the absence of domestic supplies, increases its overseas investments in the sector. These developments would reduce these countries' imports and reduce prices as overcapacity increased.

A higher emphasis on geopolitical considerations rather than economic fundamentals – with recent food price inflation fresh in the mind – would lead to even more overcapacity, while if economic viability is the only driver, less capacity would come on stream and price falls would be limited.

But whatever happens, the stranglehold of Canpotex and BPC on potash prices is expected to diminish because excess capacity will put downward pressure on prices.

Rabobank is a global financial services leader providing wholesale and retail banking for the food and agriculture industry, asset management, leasing, real estate services, and renewable energy project financing. Founded over a century ago, Rabobank today is one of the largest banks in the world, with nearly $1 trillion in assets and operations in over 40 countries, and ranks among the top rated private banks by S&P and Moody's. In North America, Rabobank is a premier bank to the food, beverage, and agribusiness industry and a leading financier of renewable energy and energy infrastructure projects. www.Rabobank.com

SOURCE Rabobank

For further information:

Lynne Burns, +1-212-808-2581, Lynne.Burns@rabobank.com

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