The Implications of a Massive Potash Surplus: Picking Strategic Juniors
COMMENTARY–ProspectingJournal.com–With the population of hungry, middle-class consumers rapidly expanding, there is no doubt a growing necessity to improve crop yields and increase agricultural efficiency worldwide. And thus there is a degree of certainty behind the belief that we will only continue to increasingly rely on the use of fertilizers in agriculture. Few can doubt that in the global potash industry demand is expected to remain on an upward trajectory. But that alone isn’t enough cause for optimism amongst a number of producers and suppliers. According to data from the International Fertilizer Association (IFA), the next four years are likely to witness a massive surplus of 7.9 million tons of potash in the global market. The data is based on the expected entry of approximately 30 new potash-related projects globally, and should they be completed on schedule, the surplus may even top 15 million tons by the end of 2015. That presents itself as a massive challenge for both producers and investors.
The data suggests that the potash industry will quickly transform into a lopsided buyers market. That means that the world’s biggest potash importers will have an edge in dictating purchase prices when negotiating contracts with suppliers, hence the challenge to producers. But what about the challenge posed to investors? In a market of over-supply, the major players, such as Canadian-based Potash Corp. (POT: TSX; POT: NYSE), will likely manage the environment with considerable ease given their size and scope. On the other hand the market is more than likely to provide significant difficulties to potash juniors, who you can bet will be fiercely competitive in trying to negotiate contracts over their rivals. Determining which of these juniors are likely to succeed is the real challenge to investors.
In selecting a junior, Brazil’s Verde Potash (NPK: TSX. V) provides the perfect blueprint for a strategic option. It is common knowledge that China, India and Brazil are the world’s three largest potash importers by quite a formidable margin. In a market that will likely force lower prices on suppliers, location with respect to any of these three countries is arguably amongst the most important factor to consider. That is why Verde Potash provides such a strong prospect. In an exclusive interview with The Energy Report, industry expert Corey Dias noted, “if one is operating a potash mine in Brazil, one has an internal market that could absorb one’s entire potash output. A company that wants to enter the potash market in a cost-effective manner would certainly aim to buy an asset in Brazil in order to benefit from the significant transportation price advantage expected to be enjoyed by the local potash producers”.
With that in mind Verde Potash has also proven that it is on the right track for full production. According to Anoop Prihar, an Analyst at GMP Securities, Verde Potash recently “closed a $28.75 million offering by issuing 4.45 million shares at $6.45/share on March 23; the proceeds will be used to complete the conventional potash bankable feasibility study at its wholly owned Cerrado Verde project located in Minas Gerais State, Brazil”. The deposit has the potential to produce as much as six million tones of potash a year for more than 20 years. According to Corey Dias, the company has released a positive preliminary report and expects to begin production by 2015, a date that “should provide Verde with an early-mover advantage in a country that is a major producer of fertilizer-intensive crops and that has very little domestic potash production”. Further adding to its allure is the Brazilian government’s emphasis on transforming Brazil’s import-reliant agriculture industry into one that reaches fertilizer independence by 2020.
That is what makes companies such Verde standout. It will be difficult to weather the storm of a market that will be controlled by buyers in the medium term. But Verde makes a strong case for itself. It benefits from a government that is likely to buy local in pursuit of long-term policies. Comparatively lower transportation costs will surely help it offset profit-slicing spot prices in a global market of oversupply. The benefits of strategic location are enormous, particularly in a market dominated by no more than agricultural powerhouses.