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by Klaus Schachinger, Euro am Sonntag
S.he prices for soy and grain have been rising for months. While they were initially close to the lows of the past ten years, prices have now reached new ten-year highs within twelve months. The United Nations’ much-noticed agricultural and food index (FAO Food Price Index) increased by almost five percent in May compared to the previous month and is now almost 40 percent above the previous year’s figure. It is the highest increase in the past ten years.
With the higher prices, farmers make significantly more profit from their harvests than they did a few months ago. These are also strong signals for the global fertilizer business. In the important US market in particular, the basic materials for mineral fertilizers such as sodium and potassium have risen sharply. A ton of potassium carbonate is currently being traded almost twice as expensive as it was at the beginning of September 2020.
Potash fertilizer is more expensive in America than it has been since 2015. This brings a lot of movement in the global market for potassium carbonate, a fertilizer that strengthens the drought resistance of plants and increases the defenses against pest infestation. The business is dominated by four corporations. They supply a good two thirds of the potassium carbonate mined annually: the Canadian nutrien, Mosaic from the USA, Uralkali from Russia and Belaruskali from Belarus.
On the stock exchange, the share prices of the North American production giants, but also those of the much smaller fertilizer manufacturer from Kassel, K + S, are rising significantly. Shares in the third largest group, Uralkali, are only traded in Moscow. Belaruskali, the number 1 in global production, is only present in the capital markets with bonds. The company is now threatened with EU sanctions because of the arrest of the Belarusian government critic Roman Protassevich and his girlfriend. Belaruskali should cope well with this, as contracts were concluded with the major customer countries India and China a few months ago. The competitors K + S, Nutrien and Mosaic, however, should benefit from possible sanctions against the prime minister.
According to the currently available figures for the market, Nutrien and Mosaic supplied 17.9 and 11.1 percent of the 65.5 million tons of potassium carbonate extracted worldwide in 2019. For Belaruskali and Uralkali it was 18.4 and 17.0 percent.
K + S can get out of the debt trap
Germany’s potash group K + S, which also operates a mine in Canada’s resource-rich province of Saskatchewan, supplied around 7.9 percent of the potassium carbonate extracted worldwide. In October, the Kassel-based company managed to sell the US subsidiary Morton Salt to the American Kissner Group for $ 3.2 billion. This freed the Hessians from their long-standing debt trap – in time for the fertilizer boom. With the sale, the estimated liabilities should drop to just under twice the operating profit. The board would have achieved its goal. More details will be available in August with the half-year figures.
The stock market value of K + S has more than doubled since the beginning of November. However, the share is still a long way from its five-year high of a good 25 euros. If fertilizer prices stabilize at the current level or if they increase even further, a lot is still possible. Industry experts at Scotiabank expect the annual potash output of currently around 70 million tons to increase by two million tons annually between 2022 and 2030.
This prospect is now also attracting ore giants such as Anglo American and BHP as lateral entrants into the market. Anglo American bought Sirius Minerals in Great Britain for $ 400 million to develop a large deposit of polyhalite. The mineral contains potassium chloride, calcium and magnesium and is used as fertilizer.
Career changer BHP
The world’s leading raw materials company, BHP, wants to get in on a much larger scale. It could cost up to $ 5.7 billion to complete its Jansen mining project in the Canadian province of Saskatchewan, where potash salt is to be extracted. Influential BHP major shareholders such as the activist US financial investor Elliott see the project very critically because of the high financial risk. BHP boss Mike Henry also wants to announce the final decision on the project in August with the publication of the balance sheet for the 2020/21 financial year.
The group has already invested more than four billion dollars and needs access to a nearby port for potash extraction. Just a problem that the well-established and well-networked nutrien in the region could solve. BHP therefore wants to get Canada’s top fertilizer on board for the Jansen project.
Developments in the fertilizer market are largely independent of what is happening in commodity markets such as copper and iron ore, where BHP is strong. Fertilizer would add value to the ore giant’s business model if the framework conditions are right. However, this will probably not work without a takeover or partnership with a fertilizer company. Companies like Nutrien and Mosaic as well as the two giants in the east have sophisticated logistics and high reserves. Nutrien’s Cory mine is estimated to have potential of up to 6,200 tons of potassium carbonate.
Nutrien was created in 2018 from the merger of the Canadian PotashCorp of Saskachewan with the much smaller competitor Agrium. With more than 20,000 employees worldwide, Nutrien says it unites more than 60 percent of the North American production capacity for potash salt and operates the sales company Canadian Potash Exporters (Canpotex) with its American competitor Mosaic in an equal joint venture.
Mayo Schmidt, who has been at the Spitzer von Nutrien since April, only wants to increase potash production if prices continue to rise. “We pay close attention to the return,” he says. Canpotex partner Mosaic, who also benefits from the synergies of joint international sales, sees it similarly. Meanwhile, K + S is trying to keep up with Canpotex in Canada – that is certainly not easy.
Due to the high demand, Nutrien’s capacities for potassium carbonate, which will be mined until the end of September, are now sold out. The world’s largest fertilizer company now wants to produce half a ton more in 2021. The Canadians do this more cheaply than Western competitors. For 2021, 13.6 percent more sales are expected so far: 22.8 billion dollars. The net profit is expected to increase by almost 79 percent to a good 1.8 billion dollars. Solid dividend yield.
K + S got off to a good start and, in view of the higher potash prices, has increased its forecast for operating profit in 2021 to between EUR 500 and 600 from EUR 440 to 540 million previously. Sales are expected to increase by almost 13 percent to a good 2.7 billion euros. The sale of Morton Salt lowers the debt to the announced level. The subsidy costs, which are high compared to the competition, reduce the inflow of funds from the business. Advances in returns bring price imagination.
Two shafts in Mosaic’s most important potash mine were closed nine months ahead of schedule due to increased outflows of saline residues. That dampens the course imagination. The competition benefits in the market. Thanks to strong demand and high fertilizer prices, around $ 2.7 billion in operating profit is expected in 2021, up 72 percent. The US company can afford the $ 1.1 billion investment for 2021. Worth holding.
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