There’s a mad rush to control potash rock assets driven mainly by the surging demand in India and China. The Anglo Australian mining giant BHP Billiton’s $39 billion bid for Potash Corp, which has turned hostile now, is the latest event in global consolidation play. The latest reports say Potash Corp may turn to other suitors, possibly from China, to keep BHP at bay.
The global consolidation of natural resources, which was limited to oil, iron ore, coal and shale gas, has now entered the food space. BHP Billiton’s $39 billion bid to acquire Potash Corporation of Saskatchewan, which owns one of the biggest stock of Potassium raw materials in the world, and controls 18% of world market for Potash, was evidently an headline event in the last one month. Earlier this year, two Russian giants Urakali and Silvinit announced that they are being merged and the combined company would control 10% of global Potassium market.
In 2009, Vale of Brazil acquired Rio Tinto's iron and potash assets for $1.6 billion, while BHP Billiton bought Canada’s Athabasca Potash for $323m.
Just to put in perspective, Potash is an integral mineral to improve crop productivity and together with Phosphate and Nitrogen forms the troika necessary to provide essential nutrition for growing crops, Potash however is getting more important than others for the following reasons:
India and China are major consumers of Potash in the world and are dependent upon imports, India to the extent of 100% and China to the extent of 50%.
Global Potash assets are concentrated in the hands of few companies. The global trade is heavily cartelized with two companies Canpotex - representing North American Producers Potash Corp, Mosaic (part of Cargill) and Agrium - and Belurussian Potash Company (representing Russian producers Urakali and Silvinit) control 70% of the global capacity and influence the prices.
Indian government ran up subsidies on fertilizers of $11 billion in FY 2009-10 out which more than 50% went into subsidizing imported fertilizers. Since India imports about 5 million tonnes of potash, a significant part of these subsidies go towards Potash imports.
Both China and India try and muscle their buying power to negotiate prices down, but this is a difficult job and may not get repeat success. Suppliers have macros on their side with the imperatives of food security, increasing food demand and reducing arable lands globally.
Topping the bull run in favor of Potash cartel is move by Indian Government to decontrol complex fertilizers such as Phosphate and Potash and introduction of Nutrient Based Subsidy scheme, to enable nutrient balance in Indian agriculture which had got skewed in favor of Nitrogen. This means more Phosphate and Potash is required.
Indian Fertilizers orders can make or mar fortunes of Global Players
In March this year, during Vladimir Putin’s visit to India , Russia’s Largest Fertilizer company, Phosagro signed a $1.5 billion three-year deal with India’s IFFCO to supply Diammonium Phosphate. PhosAgro is the second largest Fertilizer player in the world for concentrated fertilizers and Indian order accounted for almost 30% of its production capacity. The contract of million tonnes also comprised 25% of 3.8 million of India’s Compound Fertilizer Imports. Another important victory for Russians was that with this order they broke the hold of American company Phoschem which supplied 50% of Indian DAP requirement in 2009.
Also in March 2010, Belarussian Potash Company, signed $333m contract with Indian Potash Limited to supply Potassium Chloride till 2011. Acron, another Russian player for mineral fertilizer has already secured orders in India to supply 3 compound fertilizers, which will comprise 10% of its capacity. These orders are extremely important for these international companies as it secures capacity utilization and employment in their domestic economies.
So why is that China is concerned and India is sleeping?
China has the world’s sixth-largest reserves of potash and the country has been aggressively expanding domestic potash production, however, domestic deposits will never be able to meet the countries growing appetite for potash. China imported about half of its potash last year, with most of it coming from Canada. Domestic production is 3 million tonnes to 4 million tonnes annually, with potash demand last year at 7.9 million tonnes. Hence, China is working to invest in companies to develop international reserves.
To protect its long term interests, China is thinking of partnering with either Potash Corp to fend off the BHP bid or evaluate alternate bids with other players. Potash Corp already has a strategic stake of 22% in Sinofarm, one of the bigger Chinese players.
(International media reports in last few days suggest that Chinese private equity Hope Investment Management Company is putting in place a consortium, possibly backed by that country’s sovereign wealth funds, to bid for Potash Corp. The Asian press speculated that China’s Sinochem Group could be evaluating a solo bid as well. Potash Corporation, based in Canada's Saskatchewan province is also the seconf and third largest producer of nitrofen and phosphate, which along with potash are three primary crop nutrients to produce fertilizer.)
This year, India could import 5-6 million tonnes of Potash. This is its 100% requirement and more than China’s requirement of overseas Potash. Hence it is surprising how we are quiet about global consolidation moves, which could impact our national interests. The only noise we heard was some refrain from Indian firms that we will have to face up to high prices and pay subsidies. One doesn’t know whether any proactive steps like what China is doing are even on the agenda of Indian Government.
Perhaps the way India conducts its Potash business may be a reason why this issue which requires strategic investment action is not pursued with required zeal. The major players in Indian Potash imports are IFFCO, the biggest Indian fertilizer company, which is owned by a complicated structure of co-opertatives and is not owned by the government. The other company is Indian Potash Limited, which again is 34% owned by IFFCO. These organizations have their capital base built up essentially on the government subsidies and do not have recourse to any obvious funding opportunities such as accessing capital markets, being cooperatives.
Most other Indian fertilizer players in private and public sector are subsidy driven operations. Only intermittently one has seen strategic acquisitive/JV actions from IFFCO, Coromandel, Tata Chemicals, Zuari group and few others. However international companies have steadfastly retained control of the rock assets which is most strategic.
So, will India, on whose growth prospects (and also of China) , the viability of this global accumulation of Potash rock assets is taking place, take notice? Indian Government needs to review this situation urgently, and then, if it is convinced, make acquisitive moves through our natural resources companies such as NMDC or Coal India. The other option will be to create SPVs of public and private sector fertilizer companies to participate in the ongoing consolidation moves.
It would be worse if China takes lead here leaving us the most vulnerable price takers of the world. The Indian tax payer (for some decades to come) would be writing cheques to these suppliers just because we were not proactive enough to protect our interest.
(Sanjay Jain is Director, Taj Capital- a New Delhi-based boutique investment firm.)