Potash and Aluminum

Not hugely important, but I've seen the word Potash floating around for a while, and I've been kind of wondering what it is. A recent Economist article further sparked my interest... The industry seems to have some interesting dynamics in so far as you need to be close to cheap energy (such as natural gas) to be cost effective. Also, obviously, you need to be close to Potassium. If I were still in business school, the industry would make for a good corporate strategy project... Along the same lines, so would be semi conductor business (but for very different reasons). Aluminum smelting, however, sounds pretty similar to the fertilizer business (and it should thus be no wonder that the Gulf countries (i.e. the UAE) are investing in it heavily).

From the Wikipedia article of Potash:

Potassium is the seventh most abundant element in the Earth's crust, and is the third major plant and crop nutrient after nitrogen and phosphate. About 93% of world potash consumption is used in fertilizers,^[1] with small amounts used in manufacturing soaps, glass, ceramics, chemical dyes, drugs, synthetic rubber, de-icing agents, water softeners and explosives. Other main potash fertilizer products include potassium sulphate (K₂SO₄) and potassium nitrate (KNO₃).

Potash has been used since antiquity in the manufacture of glass, soap, and soil fertilizer. Potash is important for agriculture because it improves water retention, yield, nutrient value, taste, colour, texture and disease resistance of food crops. It has wide application to fruit and vegetables, rice, wheat and other grains, sugar, corn, soybeans, palm oil and cotton, all of which benefit from the nutrient’s quality enhancing properties.^[6]

Mergers in the fertiliser industry

A growth business

Feeding the world has become a mouth-watering opportunity

Feb 18th 2010 | From The Economist print edition

CorbisPotash makes the world grow round

FOR thousands of years farmers would try to ensure a decent harvest with exhortations to various deities. The weather may still be in the lap of the gods but the fecundity of the soil can now be improved by more down-to-earth means. The run-up in the price of fertiliser, which reached a peak along with most agricultural commodities in 2008, gave a taste of the money to be made by feeding the world. A recent flurry of takeovers suggests that fertiliser companies see the subsequent drop in prices as a buying opportunity before the next ascent begins.

The biggest deal so far this year was unveiled on February 15th. Yara, a Norwegian fertiliser-maker, agreed to pay $4.1 billion for Terra, an American company. The deal will extend Yara’s lead as the world’s biggest maker of nitrogen-based fertiliser. Vale, a huge Brazilian mining company, has put up $4.8 billion for two recent purchases. These will boost its phosphate- and potash-based fertiliser businesses, which serve Brazil’s vast and growing agricultural sector.

BHP Billiton, the world’s biggest mining company, has also added bulk to its potash operations. In January it paid $320m for Athabasca Potash, a Canadian business situated near a mine it owns in Saskatchewan. In a decade the combined sites could churn out 8m tonnes of potash annually, twice the output of the world’s largest mine and equivalent to a just under a sixth of global consumption. Such is the allure of potash that rumours last year suggested that Vale or BHP might bid for a big global fertiliser company such as America’s Mosaic or PCS of Canada.

The explanation for all this is undoubtedly the open maw and changing dietary habits of the world’s fast-expanding population. It is expected to grow by around a third by 2050 to over 9 billion people, who will all need to be fed. Moreover, as people grow more prosperous they eat more meat, which will require even more crops to provide feed for livestock.

China’s demand for fertiliser is expected to be particularly buoyant as a result of its huge population and the poor quality of its arable land. China is largely self-sufficient in nitrogen fertilisers. But the country is already a big importer of phosphates and especially potash. It consumes around a quarter of the 50m tonnes of potash produced in the world each year. By some estimates China alone might use 26m tonnes a year within a decade and a half.

There are other factors at work besides the world’s population pressures. The prices of fertilisers are recovering more slowly than those of other commodities, making fertiliser companies relatively cheap. That is especially true if the buyer is a mining firm, earning near-record prices once more for its ore. Big mining companies are also interested in phosphates and potash because they are generally extracted from the sort of huge mines that are their bread and butter.

The Yara deal is partly a response to lower prices for natural gas in America. Energy accounts for about three-quarters of the cost of producing nitrogen fertilisers, so cheaper gas and proximity to America’s many farmers make Terra an attractive buy. The gods, it seems, are smiling on the fertiliser-makers.