PotashCorp President and CEO Bill Doyle said last week that this fall the board of Canpotex, the Saskatchewan potash producer export group, would discuss the possibility of selling to China on a spot basis, rather than annual contracts. He said the current contract is in its third and final year. Doyle was speaking at the RBC Capital Markets Global Mining Conference June 9 in Toronto.
He said Canpotex may go to spot, and one reason would be to take some of the speculation out of the market. “I know a lot of the analyst community hold their breath every time these contracts come up and they get so focused, maybe too focused on these contracts.” Especially, said Doyle, when you consider that it represents about 12 percent of the company’s business. “So we have a lot of countries and customers that are similar size and I think if we can maybe take some of the confrontational aspects out of the contract negotiations I think that would be good.” In the past, Doyle said that it seemed to make sense to have contracts with China so that the company could run its business in an orderly fashion; however, he said that in practice it hasn’t worked out that way.
Doyle said the potash market is turning around. He said that although Brazil had taken virtually nothing in the past eight months, it will take 1 million mt in July and 1 million mt per month through October at least. Doyle added said there will be a conclusion of the India and China business, and the North American market will kick in along with Malaysia and Indonesia. “Everyone will do the same thing at the same time after holding out for such a long time, they’ll jump back in and the good news for us is that we have the distribution system and storage capacity built over the years to be able to accommodate those requirements.”
On pricing, Doyle told analysts he expects potash to remain at current levels for the short term. However, he expects 2010 will be a gangbuster year in North America, and that the next five years will be tight for potash. He said the whole system will have to be refilled for 2010, and that it may be a record year.
Much news has been made about BHP or a startup such as Potash One Inc. building a new greenfield potash mine in Saskatchewan; however, Doyle said last week that PotashCorp would do the next greenfield. “Who knows the most about this particular industry as the companies involved and some of these players are new to the potash space and clearly we respect the Vale’s and the BHP’s of the world, but their expertise is not in potash, and I would say that we have every bit as good a chance as anybody being that next mine. I do think we will be the one, but as I said the economics aren’t there. You couldn’t make that decision today, that’s why none of them have been announced.”
Doyle said that PotashCorp’s own Bredenbury, Sask., site – just north of Rocanville – has a lot of potential. PotashCorp says its geological exploration is the most advanced of any prospective new mine, complete with previously drilled potential shaft pilot holes. Doyle said Rocanville is the only mine in the world that is fully automated underground and that it is very, very efficient, adding that Bredenbury has the same capability. He said it would be tough to compete against that type of efficiency, “and for any new entrance I think they have to think about who they are going to compete against, and I think we’re formidable as a competitor.”
Doyle reiterated that new greenfield capacity will require a price increase of about $400 per ton, while current pricing justifies brownfield expansion. Unlike others, Doyle noted that PotashCorp has continued with its brownfield expansion, despite the economic downturn. He said PotashCorp should have 18 million mt of capacity by 2012. He put the cost of a greenfield 2 million mt/y mine at $4.5 billion and seven years to completion. “In the fertilizer industry, the roadside is scattered with people that didn’t take much time to analyze return on investment,” he said, adding that reinvestment economics has to be used as a base for pricing decisions.
For the current fertilizer year, Doyle is putting North American potash consumption off 40 percent and phosphate at 25 percent. He noted that this was the worst drop since 1983, the PIK (Payment-in-Kind) year, when it was only 14 percent. Doyle said the agriculture business is going to be one of the first areas to lead the world out of the current economic mess because eating is not discretionary, and food production is going to be under pressure – especially after this year of reduced fertilizer consumption.
On phosphate, Doyle said for the next three years he believes there are very good demand fundamentals, at least until the new Saudi Arabian plant comes up. He bemoaned the lack of leadership in the DAP market, noting the collapse in pricing from $1,200 per ton to below $300. “There was a saying a couple of years ago that phosphate was the new potash. Well, it clearly wasn’t.”