Chinese demand for potash, a critical fertilizer component containing nutrients that improve growth and water retention and increase crop yields, may grow by as much as 14 percent by 2020, while some major potash producers are expected to cut production by approximately 10 percent in 2012. Demand from other developing economies will further strain global supplies of the strategic commodity in the long term. To secure its own supply, China is pursuing stakes in several foreign potash production companies.
While China produces some potash, imports account for about 60 percent of the country's consumption. Despite its growing needs, China's domestic production will increase only slightly relative to its demand.
Only a handful of countries, led by Canada, Russia and Belarus, export substantial amounts of potash. Israel, Jordan, Chile and Germany are smaller producers. Control of the strategic commodity by major producers has concerned major Asian importers, particularly since 2008, when producers reduced output significantly on assumptions that demand would drop. In 2008, Potash producers were able to extract contract concessions involving supply reductions and price increases with a peak of $1,000 in 2008 from $242 in 2007 and a drop to $350 in 2010. While prices increased slightly in the second half of 2011 to $470 (the current prices), China is concerned that decreased production could boost prices again in the long term.
The Belarusian Potash Co. (BPC) — a joint stock company owned by Belarus' Belaruskali and Russia's Uralkali — and Canada's Canpotex control around 80 percent of global potash reserves and account for 65 percent of total potash production. BPC alone controls 43 percent of the global export market, due in part to its large market share in Asia, where it is the largest supplier to both China and India. Canpotex — owned by Calgary-based Agrium, U.S.-based Mosaic and the Potash Corporation of Saskatchewan (PotashCorp) — dominates North American markets and also has become a major supplier to Asian markets.
Canpotex and Uralkali were recently attempting to negotiate higher rates with major buyers, particularly China, in part to offset higher transit costs. While prices have not increased since the second half of 2011, it is a long-term concern for Beijing that prices do not go up as they did in 2008.
China was in a potash dilemma when Uralkali and Canpotex limited production in 2008, and price increases for Chinese buyers peaked at $1,000 per ton. The companies may limit production again this year, potentially forcing China into another potash problem if production cuts are sustained beyond the year. Recently, Uralkali cut its 2012 production target due to dropping demand, while trying to negotiate a supply contract with China for the second half of the year. The Chinese aimed for better contractual terms but do not appear to have the leverage to receive them since prices have remained flat.
Chinese Acquisitions
The limited number of producers, coupled with 3 percent growth in global demand over the past decade, makes the potash industry potentially lucrative. The holders of large reserves have accordingly ramped up their production — by 2 to 3 percent in the past five years — to keep up with long-term demand. But some of the major producers have struggled recently, creating opportunities for China to purchase significant stakes in the firms and break into their monopolies.
China has sought to guarantee supplies and reduce its exposure to fluctuating prices of commodities, including iron ore and precious metals, by encouraging Chinese firms to acquire stakes in mineral deposits and mining operations. Beijing is now taking the same approach with the fertilizer industry.
Beijing encouraged increased interest from Chinese firms toward potential acquisitions of potash mines and equity stakes in producing firms, with indications of Chinese interest in larger firms such as PotashCorp, Belaruskali and smaller producers. The rejection by Canada's Industry Ministry of BHP Billiton's hostile takeover of PotashCorp may have opened the door to possible Chinese investment in the Canadian firm, had there not been geopolitical constraints. Canada would not allow the Chinese or other players to break its Canpotex monopoly.
Geopolitical Constraints
China's main target for acquisitions has likely been Belarus — the fourth-largest global producer of fertilizers, with potash as its most strategic and globally integrated industry. Due to Belarusian domestic economic woes — namely, its need to pay off part of a $3 billion Russian bailout from June 2011 — Minsk was seeking an investor for a partial stake in Belaruskali. Russia (which has used its leverage over Minsk to acquire Belarusian strategic assets in the past), China and India have each expressed interest.
However, Moscow wields influence on Belarus' potash industry through BPC and does not welcome the potential Chinese stake in Belaruskali. Thus, Minsk has not yet been receptive to a potential Chinese bid, and it has increased its asking price by increasing the company's valuation in May. Beijing's failed bid highlights how geopolitics will limit China's ability to buy its way into potash production firms.
Similarly, China's potential interest to break the Canpotex monopoly through the purchase of shares of PotashCorp foundered before it began due to Canadian concerns over increasing Chinese power and unwillingness to break the Canpotex monopoly. While Canada is strengthening energy ties with China in other areas, it is doing so primarily to access Chinese capital. It has no interest in ceding control of strategic industries.
Consumer Competition
Along with geopolitical limitations, China must also overcome competition among major potash consumers for supply security. Brazil and India import more than 90 percent of the potash they consume. Indian firms have fought vigorously for control of prime fields in Saskatchewan, targeting several Canadian producers. Their attempts are bolstered by the perception among Canadian firms that dealing with India is less geopolitically risky.
China does have the advantage of well-coordinated sovereign financing for private ventures and acquisitions. This may not be enough for inroads into Canada, Russia or Belarus, but it may be sufficient for investments in some second-tier producing states, such as Israel, Jordan and Chile. China has boosted its supplies from Israel and Jordan in particular in recent years. Potash Corp. aims to expand via its bid for a greater stake in Israel Chemicals Ltd. and aimed to purchase a stake in Jordan's Arab Potash Co. in 2011, further concerning Beijing that it will be more dependent on the major producers.
Beijing also could seek to diversify its supply chain by importing from Germany and Chile, but production in those states will not satisfy Chinese demand or cannot meet China's additional import demand in the short term. Chinese potash use will decrease as Beijing improves China's agricultural efficiency, but this likely would decrease import demand only slightly. China's dependence on major potash producers will remain.
Editor's Note: An earlier version of this report contained several factual errors. It has been updated and revised.
