Introduction

Population growth and the ongoing issue of global food security have thrust the production and supply of potash into the spotlight.

Demand for potash is set to grow. The question is, how fast and how soon? What are investors to read into this past summer's shake-up in the market? And what of other key players in or looking to enter the market?

We have a growing population, an increasing focus on healthier and more varied diets, and an escalation in meat consumption – this means a greater production of grain for animal feed and increased fruit and vegetable cultivation, to sustain a greater volume of food production. Potash is seen as essential to that growth.

The limited supply of arable land will also drive demand for potash, particularly given that biofuels (another high-growth area) compete directly with food production for land.

The farming industry has to work within these constraints to increase food yields, to increase the nutritional value of food, and to build in greater drought resistance. This means the use of fertilizer, and in particular potash.

But market prices are suddenly looking far more volatile than they once did. And with good reason.

The end of an era

Despite the importance of potash in agriculture and the size of the market, potash is not traded on any exchange. About two-thirds of global production capacity has, until quite recently, been controlled by two major companies: Belarusian Potash Co (BPC) and Canpotex Ltd.

BPC is an export sales joint venture between Belarus's Belaruskali and Russia's OAO Uralkali. Canpotex is a similar venture between the three biggest North American producers: the Canadian Potash Corp of Saskatchewan Inc, Agrium Inc, and the US Mosaic Co.

BPC and Canpotex would each negotiate sales contracts, sometimes with entire countries, at a fixed price that would become the global benchmark for months at a time. They would then adjust output to support market prices.

30 July 2013 saw the public announcement of the break-up of BPC – a sudden move driven by the growing dissatisfaction of both partners of BPC with the actions of the other. The shock announcement caused the share prices of potash companies to drop sharply, by more than 20 per cent in some cases.

Uralkali's strategy was always one of 'price over volume', but given the break-up it is now free to pursue a greater market share by agreeing lower prices. Uralkali has suggested that prices may fall by up to 25 per cent as competitors compete for market share, as reported by The Financial Times1.

This has prompted serious concerns for some investors about the future of potash prices and the consequences of a price war between the largest producers2.

Enter new players

New entrants to the potash mining sector are seeking to take advantage of potash deposits in new areas, including the Republic of Congo and Ethiopia.

One of these junior miners is Allana Potash Corp, listed on the TSX. Allana's flagship asset is its Ethiopia Potash Project in the Danakil depression in north-eastern Ethiopia. Ethiopian potash deposits in this region are well known and highly concentrated. The Danakil depression is an atypical potash reserve, making it comparatively easily accessible, and therefore less costly to extract. Given the recent changes to the potash market, potential offtakers and equity investors are increasingly interested in Allana's lowcost production potential.

BHP Billiton has also confirmed that it will go ahead with the development of its Jansen project in Canada, albeit with a slower timetable.

The fact that new entrants – such as Allana and Billiton – are continuing to progress their projects indicates that market players recognise the 'compelling long-term fundamentals of the potash industry' outlined by The Financial Times3.

A mixed tale for the market

Despite all the uncertainties regarding the price of potash in the short- and medium-term and the somewhat flat demand over recent years (in large part due to poor economic conditions following the global financial crisis), the prevailing view is that global demand will continue to grow, if at a modest rate.

The break-up of BPC may lead to more market-oriented and transparent pricing for potash. If potash prices do fall, as many predict, we may well see increased demand, leading to price increases in the longer term. This would bode well for all producers, especially those such as Allana who can reap the benefits of less expensive production in the interim.

Potash today

Footnotes

1See ft.com, "BHP Billiton eyes partner for Canada's Jansen potash project" (20 August 2013)
2See bloomberg.com/news, 'potash-rift-seen-enduringafter- asia-sales-said-to-rile-uralkali' (August 21, 2013) and 'Potash rift seen lasting as Asia sales said to rile Uralkali" (August 22, 2013).
3See ft.com, 'BHP Billiton eyes partner for Canada's Jansen potash project', 20 August 2013.

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