BHP’s “Feeding the World: the case for potash” parts 1 and 2
Feeding the World: the case for potash (part 1)
17 July 2017
We think demand for potash could double by the late 2040s, by which point it could be a US$50 billion market. That’s one of the reasons why we’re investing counter-cyclically to give ourselves the option to add it to our diversified portfolio of commodities through the construction of the Jansen project in Saskatchewan.
As an essential nutrient for plant growth, potash is a vital link in the global food supply chain. And the demands on that supply chain are intensifying; while cultivated land area will remain almost static, the global population will be close to 10 billion by 2050. Not only will there be more mouths to feed but also rising calorific intake comprised of more varied diets, both of which increase the strains on finite land supply. Between now and the middle of the century, food demand will grow by 50% and sustainable increases in crop yields will be crucial if we are to continue to feed the world. Advances in farming practices, farmer education and new seed varieties will all help to optimise yields in the future. But as the quantity of production grows, so too does the amount of potassium removed by harvesting – and the sustainable, targeted use of potash fertilisers will be critical in replenishing our soils.
Mineral fertilisers are used to provide plants with potassium (K)1, one of the three essential macronutrients they need to thrive, along with nitrogen and phosphorus. Potassium has no substitute in plant nutrition and deficiency reduces resistance to drought, pests and diseases. Potassium deficient crops have poorly developed root systems and weak stalks. Not only does potassium help to improve yield, it is also known as the ‘quality’ nutrient as it affects factors such as the size, shape, colour and vigour of the seed, grain or fruit.
Potassium nutrient can be supplied to crops through the application of mineral fertilisers, organic manures and crop residues, or from the native mineral content of the soil. Potassium chloride, which is the most common type of potassium fertiliser, is often referred to as potash (which is also a generic term for all potassium compounds and potassium-bearing materials).
More than 90% of the global demand for potash comes from agriculture and around 55Mt of potassium chloride is applied as fertiliser annually. That is equivalent to 6kg per tonne of crop production, 40kg per hectare of harvested land or 7kg for each person on the planet.
The basic rationale for rising potash consumption is quite simple. Not only is the total population continuing to grow, but at least three billion people are expected to join the global middle class by 2030. That has implications for people’s diets. Average calorie intake is increasing and so is the share of those calories coming from animal products2, sugar and vegetable oils – foodstuffs that have higher demands on crop production. As a result, food demand is rising faster than population, and crop production is rising faster than food demand. The finite supply of cultivated land area cannot keep up with that demand. In 2000, arable land per capita was 2,500 square metres – about half the size of a football field. Since then it has fallen to 2,100 square metres and is projected to shrink further to 1,900 square metres by 20303. As a result, the demands of food supply must be met through higher yields from existing arable land, putting more strain on our soils. All this points to steady long-term growth in global crop production and this growth will have to be achieved through the sustainable intensification of agriculture and the optimisation of crop yields.
Arable land per capita is likely to fall by almost one quarter between 2000 and 2030, while demand for food will increase by one half.
There are a number of complexities involved in translating the expected requirement for crop production into demand for potash. Greater application of nutrients in the form of mineral and chemical fertilisers, of which potassium chloride is one, will be a key means of achieving the necessary yields – but there are others, including the use of precision agriculture to minimise nutrient losses, efforts to improve the recycling of nutrients from animal manures and crop residues, and development of hardier seed varieties.
The amount of potash fertiliser required will also depend on which crops are grown and where – because potassium uptake varies between crops and different soils have different levels of native potassium. That native potassium is a crucial factor – unlike nitrogen and phosphate, potassium is not readily leached out of soils and farmers can reduce the amount of potash fertiliser they apply by “mining” the soil. That can happen in the short-term, if the economics of buying potash are unattractive, but sometimes over longer periods if the soil is naturally rich in nutrients.
But native potassium is not inexhaustible. Quantifying aggregate soil potassium availability across whole countries is extremely difficult, but it is believed that in many parts of the world potassium is being removed faster than it is being replenished. Higher yields and multiple-cropping practices risk further depletion of soil potassium. This provides considerable upside to future potassium demand if native potassium is pushed to critical levels, increasing the share of supply that must come from external sources, particularly potash fertiliser.
… in many parts of the world, potassium is being removed from the soil faster than it is being replenished.
Potash demand sits at the intersection of inexorable mega trends ranging across demographics, economics, diet and the environment. For the producer of any commodity, such an intersection is exactly where you want to be. But demand is only half the story. In the next episode, we will focus on the supply side of the potash market.
- The element was first isolated in 1807 by Sir Humphrey Davy. The chemical symbol for the element, K, derives from ‘kalium’, the Latin version of the Arabic word for alkali.
2. Livestock is fed on a variety of materials, including cultivated crops and open grazing, with implications for land use and crop production.
3. Source: United Nations The 2012 Revision of World Agriculture Towards 2030/2050.
Feeding the World: the case for potash (part 2)
24 July 2017
While safely driving productivity gains and executing low-risk, high-return latent capacity projects is the core of what we do, we must also develop options for the future to grow shareholder value over the long-term. We have an option in Canada to develop a potash mine that could support attractive shareholder returns over decades. We’re excited to have this option in our portfolio, and there are many ways we can realise value from it. Above all else, we would only proceed if it passed our strict investment hurdles and was in the best interests of our shareholders.
In the first episode of our potash series, we concluded that the combination of population growth, changing diets and the need for cultivated soils to support higher and higher crop yields indicates a long-term trend of steady demand growth for many decades – an attractive prospect for any commodity producer. But demand is only half the story. In this second episode, we focus on the supply side of the potash market.
Potash minerals are extracted from underground deposits or from natural brines and then processed into potash fertilisers. Over 70% of global potassium chloride capacity is based on conventional underground mining. The remainder comes from solution mining and the processing of natural brines.
The natural occurrences of potash suitable for fertiliser production are geographically quite scarce, but there are a number of very large deposits. Over 60% of potassium chloride production today comes from the Prairie Evaporite in Saskatchewan, the Verkhnekamskoye deposit in Russia’s Urals region and the Starobin deposit in southern Belarus.
In the 156 years since the world’s first potash mine opened in Staẞfurt, Germany, in 1861, the industry has faced excess capacity on multiple occasions, just as it does today. The opening of the Canadian basin in the 1960s and 1970s produced one such period, as did the collapse of the USSR in the 1990s, with output from Russia and Belarus being re-directed to the international market.
The latter episode resulted in a lengthy period of minimal investment through the 1990s and early 2000s, which eventually led to the market tightening and contributed to a bull run in potash prices from 2003 to 2008. The end of this run coincided with what has become known as the “Global Food Price Crisis” of 2007-08. Somewhat overshadowed by the Global Financial Crisis that soon followed, the 2007-08 period highlighted what can happen when strong demand emerges after a sustained period of weak investment in new capacity.
Potash producers responded to this boom with major investments in capacity expansion. In the 10 years to 2016, the industry added nearly 27 million tonnes of annual “nameplate” capacity, but sales volumes did not rise to the same degree1. Moreover, while the period of brownfield expansion may now be coming to an end, greenfield supply will also come on-stream over the next five years. That indicates that over-capacity in the industry, which has already contributed to potash prices slipping to their lowest levels in a decade, is likely to get worse before it gets better. That will put further pressure on higher-cost incumbents and some of the industry structures that have evolved over time.
Although the near-term outlook may be sombre, we expect to see the peak of over-supply occurring within the next few years. Positive underlying demand fundamentals, assisted by affordable pricing, should see consumption catch up to capacity in the 2020s. The exact timing of the market returning to balance is uncertain. It will depend upon a multitude of factors on both the demand and supply side, including the capacity utilisation rates of existing operations. As the market progressively balances we expect prices to improve and the need for additional greenfield supply to re-appear. The potash market is one where patience will be rewarded.
We do not anticipate that a “pinch-point” like the one that contributed to a major spike in prices in the mid-2000s will emerge. What would have to happen to get there again? Well, a lot of the new capacity in the pipeline would need to fail to reach production – either for economic or technical reasons – and at the same time demand in large markets, like India and China, would need to outstrip our expectations.
Alternatively, what would have to happen to keep prices around their current levels in the long-run? First of all, huge improvements in productivity would be required to substantially lower the projected costs of adding the new supply that is required to balance the market. Secondly, the exchange rates of the countries that house the major producing basins – the Canadian dollar and the rubles of Russia and Belarus – would have to remain at their currently weakened levels. In the case of Russia, that would require oil and gas prices to remain depressed, and sanctions on the rest of the economy to remain in place for the long term. As we have argued here before, the fundamentals of the oil market make that unlikely. And if energy prices were to rise, then the Canadian dollar is also likely to make gains. Thirdly, uneconomic capacity would have to stay in the market well beyond the traditional “stickiness” seen during commodity price downturns. In our minds, that combination of factors – huge industry wide productivity gains, bottom-of-cycle exchange rates and the presence of excess capacity ad infinitum – are most unlikely to persist individually, let alone co-occur indefinitely. In other words, it may take some time for potash prices to recover, but today’s prices are not sustainable given the need for the industry to grow with demand over the long-term2.
- Source: CRU. “Nameplate” capacity, also known as “installed” capacity, is the annualised production of a mine based on the maximum daily rate. For supply forecasting, it must be discounted for ‘imperfect’ factors, discretionary or otherwise.