A New Landscape for Potash - Fertilizer International

PK POTASH
The climate for investment in greenfield
potash projects may be cooling, but other
capacity expansions are still under way,
notably in Canada and Russia. We gauge
the likely impact on the market balance in
the medium- and longer terms.
Uralkali is pressing ahead with several capacity
expansion projects, including the long-term
development of a mine at Ust-Vayva.
A new
landscape for potash?
H
igh prices for potash have attracted
an unprecedented surge in investment projects in the potash sector.
While 2012 was marked by relatively flat
prices (Fig. 1), the bull market is expected
to continue into 2013/14, and there is a
consensus among the global potash producers and analysts that the industry fundamentals are very strong indeed. These
fundamentals are underpinned by growing
demand, which is the result of increasing
global population, pressure on available
arable land, income growth in developing
countries, as well as potential demand
growth stemming from the biofuels and
scientific sectors. In addition to a higher
demand for food as driven by a population
that is forecast to grow from a present 7
billion to 9 billion by 2050, people will be
improving their diets, and farmers will need
to produce 70% more food on little new
land. Potash will play an ever more significant role in helping to achieve vital gains
in agricultural productivity.
As measured against these highly positive fundamentals for consumption, the
supply of potash to meet rising world poses
a greater challenge. There are relatively few
world-ranking players among the producers
at present; potash is a relatively scarce
mineral, with the major reserves located in
36
remote areas of Canada, the Former Soviet
Union and elsewhere, and any increase in
production capacity requires high capital
expenditures and long lead times. Historically, the barriers to entry in the industry
have been high and there have been a limited number of players able to bring additional capacity on stream.
Nearly two decades of lacklustre world
market prices were a further deterrent on
investment in potash production, but skyrocketing commodity prices from 2006/07
unleashed a raft of capacity expansion
projects among the established potash
suppliers, as well as an interest from other
mining majors not previously represented in
the potash sector (notably BHP Billiton and
Rio Tinto) and an unprecedented wave of
greenfield projects launched by junior mining
companies. In all, over 200 potash projects
are currently proposed, involving potential
capital expenditure in excess of $50 billion.
PotashCorp alone has committed $8.2
billion in a phased expansion programme
that will raise capacity at its mines in Saskatchewan and New Brunswick. Uralkali
likewise is spending a total of $5.8 billion
between 2011 and 2021 to phase in additional capacity via debottlenecking at its
existing facilities, expanding capacity at
its Solikamsk-3 and Berezniki-4 mines, as
well as bringing on stream after 2020 new
mines in the Ust-Yayvinsky and Polovodovsky fields.
These developments, comprising committed expansion projects, as well as more
speculative greenfield ventures, beg the
question whether the potash sector is at
risk of excess capacity in the long term.
The present-day potash scenario comprises a highly concentrated supply structure and high levels of profitability among
all leading participants, as shown in Fig.
2. In 2011, the combined gross margin of
the leading potash producers was around
$12 billion. When measured against the
universally optimistic forecast for longterm demand growth, it was inevitable that
more companies would seek to enter the
market. But how easy is it to develop a
greenfield site and launch potash production? A junior mining company will have to
undertake the following steps in bringing a
resource on stream:
● Identify the resource
● Explore and measure the resource
(seismic drillings, etc.)
● Secure permits
● Conduct feasibility studies, including
environmental assessments
● Issue contracts for engineering, construction and procurement
Fertilizer International 452 | January - February 2013
potash PK
l
l
Secure marketing contracts
Start production.
Lead times are considerably longer for
potash projects compared with other fertilizer projects, generally assessed as a
minimum of seven years before the revenue stream begins, but more typically
much longer, and the capital requirements can be open-ended. Uralkali, for
example, estimates that the cost of bringing a 2 million t/a KCl greenfield mine
and processing plant on stream is a minimum $4.1 billion.
Much of course can go wrong in the
interim period, with a high risk not only
of the capital raised being depleted well
before any production is in prospect, but
also because of issues arising during the
exploration, permitting and feasibility study
phases. Calls for fresh capital throughout
the various stages of a greenfield project
are highly likely, posing the question of
how long investors in junior mining companies will be willing to wait for a return.
William J. Doyle, President and CEO of PotashCorp, estimated that investors would
have to wait for at least 20 years before
they would receive any significant payback.
In the wake of the financial tribulations
that have affected much of the developed
world, a cooler climate for investment prevails at present, above all in mining ventures
in all sectors. It is significant to note that
the number of newly-announced junior min-
ing potash projects has progressively tailed
off since the zenith years of 2007/08.
The existing potash producers however
face fewer such constraints. They can add
extra capacity at marginal cost and from existing capital resources. They will also protect
their existing market position, thus ensuring
the strongest challenge to new entrants.
The established potash producers have
announced around 40 potash expansion
projects, due to come on stream within the
next decade. These include:
l Capacity enhancements by the three
leading Canadian producers (PotashCorp, Mosaic and Agrium), comprising
over 14 million t/a.
l Enhancements and greenfield projects
in Russia that will add over 8 million t/a
of extra capacity.
l Belaruskali plans to add 2 million t/a
through enhanced capacity.
l Additional capacity will also come on
stream in China, Chile and Brazil.
These projects alone will have a significant impact on potash availability in the
short-to-medium term, in a market that
consumed 36.4 million tonnes K2O (58.6
million tonnes KCl) in 2011. PotashCorp
and Uralkali both contend that the expansions by the established producers will
more than adequately meet forecast levels
of increased demand.
But will this satisfy the major potash
importers? India, China and Brazil predomi-
Fig 1: Potassium chloride prices (2001 to date)
$/tonne
1,000
Potassium chloride (fob Vancouver)
800
600
400
200
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Fertilizer International 452 | January - February 2013
nate in the world trade for potash, accounting for approximately 40% of traded
volumes in 2011. Brazil has embarked on
a long-term programme of import substitution, using Vale to spearhead projects
to develop additional potash capacity in
Brazil, while India – dissatisfied with suppliers’ stance on prices in recent years
– boycotted large-scale potash imports
during much of 2012 and may in due
course form joint-ventures with alternative
suppliers, including some of the greenfield
projects. However, for all their declared or
implied dissatisfaction with present potash
supply arrangements, the leading potash
importers of India and China have to date
remained largely aloof from supporting
greenfield projects promoted by junior mining companies.
Extending the nutrient portfolio
Yara is one leading fertilizer producer not
currently involved in the potash sector. The
company however has identified potash as
a strategic area for new investment and
has two on-going potash initiatives. It has
taken a 19.9% equity stake in the Ochoa
project being promoted by IC Potash Corporation to produce potassium sulphate in
New Mexico, and Yara has also taken 51%
ownership of the Dallol project in Ethiopia,
which will also supply potassium sulphate.
Additional weight should be given to the
probability of junior mining greenfield
projects coming on stream once they have
financial support from large-scale strategic partners of the calibre of Yara. Significantly, Yara declared that it has sought to
avoid competing with the established potash majors: both initiatives are outside the
established industry in product, technological and geographic terms.
The Russian fertilizer producers JSC
Acron and EuroChem have also advanced
plans to enter the potash sector. In 2008,
Acron was awarded the licence to develop
the potassium-magnesium salt deposits
in the Talitsky area of the Verkhnekamsk
region. The Acron licence covers JORC-estimated resources of 157.2 million tonnes
K2O. The $2 billion project will include the
construction of a 1 million t/a potash mine
which is scheduled for commissioning in
2016. Stage 2 of the project envisages the
doubling of production to 2 million t/a in
2018.
Via its North Atlantic Potash Inc. subsidiary, Acron is also developing the Prairie
Evaporite potash deposit in Saskatchewan.
33
PK potash
Fig 2: An examination of the profitability of the leading potash producers (2006-2010)
PotashCorp K
2006
Mosaic K
Agrium K
2007
Intrepid
Silvinit
Uralkali
2008
K+S K & Mg
ICL K
2009
+32%
APC
SQM K
2010
Vale K
Qinghai
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Source: Integer Research
North Atlantic Potash has completed seismic exploration and has commenced drilling on four permits in the Foam Lake area.
EuroChem has declared its ambition
to become one of the top five global fertilizer producers within the next five years,
expanding its geographical footprint and
entering the potash sector to complete its
representation in all three primary nutrient
sectors. The company has two large greenfield potash mines under development, at
Gremyachinskoe in the Volgograd region
and at the Verkhnekamskoe deposit in the
Perm region. The projects give EuroChem
access to reserves of around 3.2 billion
tonnes, estimated as the fifth largest
globally. Initial production at Gremyachinskoe is targeted at 2.3 million t/a, while
Verkhnekamskoe is expected to produce 2
million t/a. The first production at Gremyachinskoe could begin in 2016.
The forecast expansion in capacity
accounted by the existing potash producers must be set against a background
of forecast compound annual growth in
demand of between 2.7-2.9%. Over the
next five years, this growth in demand will
be met almost entirely by the established
producers and increased output at existing
production facilities. The market is therefore expected to remain the preserve of
the present industry players, and concentration will remain the norm, with the Canpotex and Belarus Potash Company (BPC)
33
export consortia accounting for around
65% of total potash trade.
A sideways look at SOP
In addition to Yara and its joint-venture
partners, other potential new entrants have
been eyeing the potassium sulphate (SOP)
market. This sector accounts for around
6 million t/a of total potash demand. The
potassium sulphate currently supplied to
the market is produced via several process
routes, including the recrystallisation of neutral salts, reacting KCl with pure sulphuric
acid in a Mannheim oven, and the evaporation and crystallisation of brines. Expansions of capacity are foreseen in China and
Chile, while greenfield projects are envisaged in New Mexico and the United Kingdom. These latter involve the exploitation
of the polyhalite resource, which has been
relatively under-exploited to date.
As already noted, the IC-Potash project
in New Mexico involves Yara as a strategic
partner. In the UK, Sirius Minerals had proposed to develop the York Potash project
to produce up to 1.4 million t/a of potassium sulphate from processing polyhalite
as a first phase of production which was
planned to begin in 2017 at an estimated
capital cost of $2.7 billion. Sirius Minerals has now changed strategic direction,
and proposes to produce around 5 million
t/a granulated polyhalite for compound
fertilizer production. Polyhalite is a mixed
sulphate material containing potassium,
sulphur, magnesium and calcium and is
not currently traded as a fertilizer. This
shift in effect cuts the capital cost of the
project by 37% to $1.7 billion.
The IC Potash Ochoa project could
prove a game-changer in potassium sulphate markets. The project involves 414
million tonnes of proven and probable
reserves and 838 million tonnes of measured and indicated mineral resources.
Based on production of 568,000 t/a of
potassium sulphate and 275,000 t/a of
potassium magnesium sulphate, IC Potash
forecasts industry-leading production costs
for potassium sulphate and a low capital
cost of $706 million. The company has set
a target date for production to commence
in 2016.
Can the new capacity be absorbed?
IFA forecasts that global potash capacity
will rise to 98.3 million t/a KCl by 2016,
assuming that all announced capacity
projects planned for completion between
2012 and 2016 will come on stream.
According to estimates by Uralkali, global
capacity could rise further, to around 105
million t/a KCl by 2020, set against a forecast demand of 69 million tonnes. These
forecasts must be considered tentative,
as the projects to raise capacity remain
Fertilizer International 452 | January - February 2013
potash PK
subject to slippage in attaining production.
Vladislav Baumgertner, CEO of Uralkali, suggests that a more fragmented
market for potash could prevail from
2019/20, as a result of well-capitalised
new entrants and expansions in Brazil
and China to substitute imports with
domestic production. The combined market share of Canpotex/BPC could therefore fall to below 50%.
Vladislav Baumgertner asserts that
there is no need for significant numbers
of newcomers to enter the global potash
market. He believes that greenfield project
operators, faced with full-scale amortisation costs, would suffer an inherent disadvantage in matching the established
producers in terms of costs of production.
The established Russian and Canadian
producers enjoy cash costs of production
equivalent to between $100-150/t f.o.b.,
while K+S Kali is also competitive at an
estimated $250-265/t f.o.b. These and
other well-established companies also
follow a vertically integrated business
model and exercise good control over the
full potash value chain. Their combined
brownfield and greenfield capacity port-
folio is expected to reach 94.3 million
t/a KCl by 2021. Even if the recent soft
trend in potash prices persists over the
longer term, the investment programmes
launched by the Canadian, FSU, German
and other established producers will earn
a payback, Mr. Baumgertner believes.
On the other hand, the element of risk
is high in any forecasts for the longer-term
well-being of the established potash producers. Vladislav Baumgertner points to
the risk of losing mines through flooding,
which Uralkali has experienced first-hand
at Berezniki-1 and -3.
To summarise, global potash markets
are on the threshold of significant change,
though this may only become apparent in
the medium-to-longer term. There will be
a greater Russian presence, including the
newly-merged Soyuzkali operations and the
new entrants EuroChem and JSC Acron.
The Canadian expansions are well under
way and will come on stream sooner. A
key question among industry analysts is
whether the Canadian producers will accept
lower potash market prices if the market
foresees a product glut.
Considerable uncertainty surrounds
Fertilizer International 452 | January - February 2013
the greenfield projects being promoted
around the world by junior mining companies. Many obstacles could potentially
delay or damage the likelihood for fulfilment – very much the norm for all mining
projects – and those junior miners who
secure early strategic partners face the
best prospects. Financial markets appear
increasingly less willing to accept the
risks involved in new potash ventures, a
factor which EuroChem appears to have
acknowledged when it stated that it was
considering separating its long-term potash developments from the rest of the
group’s business in order to facilitate a
stock offering for its nitrogen and phosphate fertilizer operations. EuroChem has
contemplated an IPO (Initial Public Offer)
but has stated that it believes that its risk
profile remains too high to go public in the
short term.
Extra potash capacity and new entrants
will undoubtedly affect the supply/demand
balance of the global potash market, but
the impact of these changes will depend
on the extent to which buyers and sellers can wield their respective bargaining
n
power. 33
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People & projects
PROJECTS
that it had secured Yara International as a
strategic partner. The Norwegian company
pledged an investment of approximately
C$40 million and has entered into an offtake agreement for the purchase of 30%
of all products produced at Ochoa for a
period of 15 years.
SNC-Lavalin to undertake IC Potash
study
IC Potash completes New Mexico tests
IC Potash announced the successful
completion of the aquifer tests it has conducted on two recently-completed drilled
groundwater supply wells at its Ochoa
potassium sulphate mine project site in
Ochoa, New Mexico. CEO Sidney Himmel
said: “The test successfully demonstrated
the desired pumping capacity of these two
wells drilled earlier this year by IC Potash.
Moreover, test results have confirmed the
aquifer’s suitability to sustainably provide
the project with high-yield, long-term supply
of non-potable, brackish water that will not
compete with the surrounding communities’ use of fresh water.” He added that
IC Potash remains on schedule and on
budget with the development of the project
and is making good progress with its bankable feasibility study, which is expected to
be completed by the end of August 2013.
IC Potash’s Ochoa project is located
close to the existing Mosaic and Intrepid
Potash potassium chloride and potassium magnesium sulphate production
facilities in New Mexico. The company
has completed five years of exploration,
engineering and permitting work on the
project, which is well advanced in reaching the target date of 2015 for the commencement of production. The IC Potash
Ochoa project involves 414 million tonnes
of proven and probable reserves and 838
million tonnes of measured and indicated
mineral resources. Based on production of
568,000 t/a of potassium sulphate and
275,000 t/a of potassium magnesium sulphate, IC Potash has the resources to sustain at least 100 years of mineable ore.
The company forecasts industry-leading
production costs for potassium sulphate
and a low capital cost of $706 million.
In March 2012, IC Potash announced
55
IC Potash has meanwhile awarded SNCLavalin the contract to undertake a feasibility study of the Ochoa project. The
technical scope of the feasibility study
will cover the recovery methods, project
infrastructure, processing facility, load-out
and ancillary services to produce potash
from the IC Potash polyhalite resource. The
project will include the process design and
optimisation of the production processes,
together with material handling, granulation and load-out of the finished products.
The remit will also include an assessment
of the project’s capital cost and assistance to IC Potash in the economic analysis
of the project.
MagIndustries ends Ameropa
agreement
MagIndustries has terminated its agreement with Ameropa to market the entire
production from the first two development
phases of its Mengo potash project in the
Republic of Congo. The company cited
its desire to maximise its flexibility over
the marketing of future potash production and will develop a new distribution
strategy. The change in marketing tack
reflects the new ownership of MagIndustries’ associated company, MagMinerals,
operator of the Mengo project, which was
acquired by the Chinese company, Evergreen Resources, in 2011. The Mengo
project envisages the initial production of
500,000 t/a of potash.
US nitrogen contracts awarded
ThyssenKrupp Uhde announced that its
US subsidiary, Uhde Corporation of America, has been awarded the contract by
CF Industries to provide engineering and
services for two new nitrogen fertilizer complexes in the United States. CF Industries
will construct a new ammonia and urea/
UAN facility at its Donaldsonville, Louisiana complex and new ammonia and urea
units at its site at Port Neal, Iowa. The two
projects are expected to cost $3.8 billion.
Of this total, $2.1 billion is due to be
spent on expanding capacity at Donaldson-
ville. The work will comprise units with the
capacity to produce 3,300 t/d ammonia,
3,500 t/d urea, 1,520 t/d nitric acid and
4,500 t/d UAN solutions. The ammonia,
nitric acid and UAN plants will use technology licensed from ThyssenKrupp Uhde,
while Stamicarbon will supply its licensed
Urea2000Plus™ urea synthesis technology. This will feature Stamicarbon’s pool
condenser. The urea and UAN plants are
scheduled to begin production in the second half of 2015, while the ammonia unit
will follow in 2016.
At Port Neal, CF Industries will build a
2,200 t/d ammonia plant, together with a
3,500 t/d urea granulation unit. The new
facilities are scheduled to come on stream
in 2016.
For both complexes, ThyssenKrupp
Uhde will undertake basic engineering,
detailed engineering, procurement and
supply services.
ThyssenKrupp Uhde wins OCI and
LDAN contracts
OCI Construction Group has awarded ThyssenKrupp Uhde the engineering and procurement contract to build a 4,300 t/d
UAN solutions plant at Wever, Iowa. The
plant will be operated by the OCI subsidiary, Iowa Fertilizer Company (IFCo). The
plant is scheduled to be commissioned in
2015 and will be one of the world’s largest single-train liquid fertilizer plants. It will
also be the first new large-scale fertilizer
complex to be built in the United States in
almost 25 years. The estimated cost of the
project is $1.4 billion.
ThyssenKrupp Uhde will develop the
engineering for six of the seven process
plants, as well as supplying the required
process equipment. As an additional product, the plant will produce a high-purity diesel exhaust fluid (DEF) urea solution, which
will reduce NOx emissions from vehicle
exhausts. A granular urea plant will also
be provided, using the ThyssenKrupp Uhde
Fertilizer Technology (UFT) process.
In Vietnam, a consortium comprising
ThyssenKrupp Uhde, Toyo-Thai Corporation Public Company Ltd., Toyo-Vietnam
Corporation Ltd. and Lilama 69-1 Joint
Stock Company, has won the contract to
construct a new low-density ammonium
nitrate (LDAN) plant in Thai Binh province.
The lump-sum turnkey project is worth
about $200 million. The LDAN plant will
be operated by Mining Chemical Industry Holding Corporation (MICCO) and will
have a capacity of 625 t/d LDAN, meeting
Fertilizer International 452 | January - February 2013
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