BHP Group PLC (LON:BHP) said in commentary that ran alongside interim results this week that it expects the price for muriate of potash, otherwise known as MOP, to increase by around 2-3% per year over the next decade or so.
From BHP’s point of view, that analysis makes it worthwhile sticking with the giant Jansen project in Canada, which it has been working on for more than a decade.
That the project has yet to make it into production is partly a reflection on the variability of the potash price in the intervening period. Last year, BHP did not seek board approval for funds to complete the mine, but for 2019, the company has earmarked US$240mln. In 2017, Deutsche Bank estimated that the project would require around US$12.8bn in total capital expenditure to bring it into production.
So BHP’s decision to push ahead again is a considerable vote of confidence in MOP, and more broadly in the fertiliser market in general, in which two other major products also figure.
MOP is one of two major forms of potash fertiliser that is sold on a large scale to farmers around the world. It’s the most widely used, but under some circumstances can increase soil toxicity, so it needs to be carefully managed. Nutrien Ltd (TSE:NTR), the company formed by the merger of Agrium and PotashCorp, is a major producer.
The other main form of potash fertiliser is sulphate of potash, which is considered to be the premium product because it increases the resilience of the plants themselves as well as yield. It’s usually used on higher value crops, like nuts, fruits and coffee. SQM (NYSE:SQM) is a major producer.
A third major form of fertiliser, polyhalite, is about to debut on the market in a big way too, assuming US$3bn in debt financing can be found for the Sirius Minerals (LON:SXX) project in northern England.
Serious fertiliser buyers have signed off-take deals with Sirius, so it looks as though there is confidence in the market that polyhalite will make the grade when set against its more established rivals. It’s particularly designed to make inroads into the higher end of the market.
It remains to be seen if it will, but if BHP is right about the ongoing increases in demand for MOP, then at least polyhalite will be able to debut into a strong market.
In MOP at least, BHP reckons demand is likely to exceed existing supply “by the mid-to-late 2020s”, and it’s not alone in that outlook. Nutirien has said that it expects that new capacity will be “more than absorbed”, with significant tightening of supply even if the market only grows at 2.5% per annum.
Since annual consumption growth has averaged 4% over the past five years, it could be argued that that 2.5% projection is conservative.
But on the other hand, it’s also worth noting that potash prices at the moment are trading at below their long-term average, so it’s not exactly as if the market is moving into boom time.
According to data provided by Infomine, potash prices have dropped by around a third over the past four years. And worse, potash is down by around 70% since it peaked towards the end of the last decade.
But even as new production like Sirius’s is planned, demand is also continuing its inexorable rise. BHP’s own projections give the potash market a US$50bn valuation by 2040.
How smooth the ride will be on the way, remains to be seen though.
For now, Nutrien has noted a recent shift in acreage in China into more potassium-intensive crops like fruits and vegetables. That favours SOP, and also potentially polyhalite, although so far the off-take deals that have been struck are looking west to the Americas rather than east.
But for investors and potential lenders looking at the billion dollar price tags of projects like Jansen or Sirius’s polyhalite project, there are still plenty of grounds to be cautious.
After all, the major Canadian and eastern European producers also have the capacity for expansion, and they’ve shown in the past that they can lock up the market too.