Thursday, 21 June 2012

New Supply in the Potash Industry - The First Greenfield Mine In Four Decades

As discussed earlier, the most significant threat to incumbent potash producers is the potential of major new supplies of potash coming online, which would put downward pressure on both prices and profits.  However, the barriers to entry are very high: a capital cost of $4-5.5 billion, and many years before a greenfield mine reaches full production.
This week, German-based K+S AG broke ground on the first new potash mine in more than four decades (there have been expansions of existing mines, however).  The company, as a long-time producer of potash, has credibility that some other would-be producers lack.  For instance, K+S projects that it will take more than a decade to reach full production of 2.86 million tonnes/year, a much more realistic timeframe than is often cited.
However, the company announced a rather optimistic 2015 as their target date to begin producing at 1 million tonnes/year, and a capital expenditure of just $3.25 billion, significantly lower than most other estimates of the cost of bringing on new production.  Time may show that both of these estimates are too low.
The company also suggested that once in production, it's unlikely to sell its potash through the Canpotex marketing body, citing European anti-trust issues.  However, it reiterated its long-held philosophy of maximizing price, rather than the volume of tonnes sold, even if it requires restricting supply.
Overall, this new development should not cause investors in Potash Corp, Mosaic and Agrium to tremble.  The new capacity will be a long time coming.  And it's moderate in size, especially in the early years, which shouldn't cause significant pricing pressure.  Moreover, any pricing weakness will be counteracted by withholding supply.  However, the added production figures to be sizable enough to increase risks for other aspiring newcomers.  BHP's large Jansen project remains the wild card in the potash industry, but recent signs suggest the company will at least postpone a decision on the project.  If K+S's move was enough to give BHP pause, this week's announcement may actually turn out to be positive news for potash investors.

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