Fertilizer Outlook Strong in spite of Economic Uncertainty

By Leia Toovey- Exclusive to Potash Investing News

Despite uncertainty over the stability of the global economic recovery, the fertilizer market is holding up very well, and will be buoyed over the coming years by supply shortages. According to David Delaney, Potash Corporation of Saskatchewan (NYSE:POT) executive president and COO, global potash production this year will likely fall short of target. The world’s potash supply capability in 2011 had been projected at 61 million tonnes. This will probably not be realized due to several factors. “Hitting the target would have required perfect production, very little downtime,” said Delaney.

Delaney added that perfect production is already an unattainable goal for Potash Corp, with mines already impacted by various delays. “We’ve had ramp-up issues at Cory. We had a few minor issues at Allan. We had geology issues at Lanigan. So hitting every day, perfect production to fit this demand is really quite difficult.” Potash Corp is already pushing to maximize supply in order to meet growing demand for potash; however, Delaney says that it will be very difficult for the company to meet its maximum supply capability in both 2011 and 2012. The 2012 maximum supply capability for Potash Corp is between 63 and 64 million tonnes.

Market forecast

August growth forecasts for both the US and the Eurozone have already been marked down sharply; however, the fertilizer sector will get all of its needed support from demand growth in the emerging markets. In their monthly commodity price index, Scotiabank  recognized that in general, commodity prices will lose ground in August, due to the weaknesses in the US and the Eurozone, however, “ongoing demand growth in the emerging markets — particularly China — will provide considerable underpinning as will ultra-low interest rates,” commented Patricia Mohr, Vice-President, Economics and Commodity Market Specialist. Mohr added that “Physical supply/demand conditions in many commodity markets are still tight — especially in copper, iron ore, the grains and oilseeds and fertilizers such as potash.” Mohr anticipates that potash supply/demand conditions should tighten further in 2012, with “onward growth in global consumption in the face of only limited mine and mill expansion.” Potash Corporation of Saskatchewan will be the pioneer in supply growth, leading world capacity expansion through 2015.

Acquisitions and expansions heating up

Despite its failed bid for Potash Corp of Saskatchewan, BHP Billiton Ltd. (NYSE:BHP), cash rich after reporting record-high profits is on the lookout for opportunistic mergers and acquisitions with copper, energy and potash at the top of the company’s interests, according to Chief Executive Officer Marius Kloppers. “Opportunity has always been the limiting factor, not ability to fund, and I don’t think that that has changed,” said Kloppers. Kloppers added that there are only a few key commodities where the company would be interested in acquisitions. “Non-organic growth really has got to come from perhaps base metals, copper, or petroleum, oil and gas, or potentially in potash. The universe of potential things that we would be interested in is not that large.”

Another major miner, Vale (NYSE:VALE), is interested in expanding its exposure to fertilizers, and its current target is a phosphate mine in Nampula, Mozambique. According to an official source, the phosphate concession is being discussed by the Brazilian company and the Mozambican Directorate for Mines. Vale has already been awarded a coal mining concession in Mozambique, by the government, and is also looking into other coal concessions in the African country.

As part of a global goal to increase fertilizer production, Israel Chemicals Ltd. (TLV: ICL) announced this past Sunday that it was expanding its production capacity in India. ICL and its local partner, Zuari Industries, will build two more soluble fertilizer plants in India. Yossi Zidon, head of ICL Specialty Fertilizers, said that “the decision to expand the cooperation with Zuari Industries is a further step in the implementation of our expansion strategy in specialty fertilizers abroad and in general – mainly in emerging markets where we see considerable growth potential.” Demand for fertilizers is skyrocketing, and after a very profitable second quarter, ICL has the cash on hand to fund expansions. Last week, ICL published its financial results for the second quarter of 2011, reporting a net profit $119 million, a 44 percent increase in net profits compared to the same time period a year earlier.

Disclosure: I, Leia Toovey, have equity interests in Potash Corporation of Saskatchewan and BHP Billiton