Potash Price War May Signal End of BHP’s $15 Billion Project

The break-up of OAO Uralkali’s potash marketing partnership may signal the death knell for plans by BHP Billiton Ltd., the biggest mining company, to spend as much as $15 billion to start producing the crop nutrient.

Uralkali, the largest potash producer, yesterday quit a venture that controlled about 43 percent of global exports and signaled prices may fall by as much as a quarter. BHP’s Jansen project in Canada contains a 3 billion-metric-ton resource.

“This could be a game changer” for the project, Heath Jansen, an analyst at Citigroup Inc., wrote yesterday in a note to clients. “Uralkali appears to have started a price war. We would argue that the risk reward of proceeding with the project is moving toward not proceeding.”

A spokeswoman for BHP declined to comment.

The move by Uralkali to end its venture with Belarus sent shares of potash producers plunging as much as 27 percent from Israel to Germany to Canada and the U.S. as investors speculated a flood of supplies will lead to lower prices for potash, a soil nutrient that strengthens plant roots. Uralkali, part-owned by billionaire Suleiman Kerimov, said it exited the venture after Belarus undermined the sales agreements.

BHP Chief Executive Officer Andrew Mackenzie last month said the mine was “a great option, but it’s just an option.” According to the Melbourne-based company’s website, Jansen has the “potential to become one of the world’s premier potash mines.”

Fifth Pillar

While the company has said it sees the fertilizer ingredient becoming the fifth pillar of its business in addition to copper, iron ore, coal and petroleum production, BHP has delayed a final investment decision amid a freeze at the company on approving new projects to combat waning demand for raw materials.

Uralkali now plans to boost sales to consumers including China, which imports about a fifth of global supplies, the Berezniki, Russia-based company said. The change in trading policy may push prices below $300 a ton, CEO Vladislav Baumgertner told reporters. That’s at least 25 percent below the current contract price for China.

Prices for the nutrient have been falling, demand is waning and stockpiles have been growing. The so-called price war started by Uralkali may last as long as 18 months, leading to even lower prices, Citigroup said.

Capacity Needed?

“If everyone knocks down their price forecast, then obviously that’s going to make a lot of difference to a lot of people’s cash-flow models,” Paul Burnside, principal consultant on potash for London-based research company CRU, said yesterday. “I’m fairly skeptical about further additions of capacity in general. I’m really struggling to see why it’s needed.”

Still, a drop in prices will see producers canceling projects at the same time as encouraging a future rebound in demand from consumers in China and India, Ash Lazenby, an analyst at Liberum Capital Ltd. in London, wrote today in a note to clients.

London-based Sirius Minerals Plc is among companies weighing new potash output. It is studying building a $1.9 billion potash mine in a national park in Yorkshire, in northeastern England.

“Given Sirius will not commence production in earnest until 2017, it stands a better chance of entering the market post the industry restructuring and under tighter supply/demand conditions,” Liberum’s Lazenby said.

Sirius Development

Sirius requires approval from local planners and financing before starting development. The economics of the project can withstand a drop in prices, Chief Executive Officer Chris Fraser said in e-mailed comments to Bloomberg News yesterday, after Uralkali’s announcement.

“The expected margins within the York Potash Project are sufficiently robust to enable the project to withstand short term price downside scenarios,” Fraser said. “The long-term outlook remains for increased demand and the fundamentals of that demand remain strong.”

For BHP, the Jansen mine may cost as much as $15 billion to build and the company may only proceed on a “de-risked basis,” either through selling a stake or bringing in a joint-venture partner to help fund construction, Bank of America Merrill Lynch analysts said last month.

‘Don’t Work’

Potash Corp. of Saskatchewan CEO Bill Doyle said in May the economics of Jansen “don’t work” and that it’s unlikely to proceed. BHP said in 2011 it had committed to spending $1.2 billion on the project and almost $2 billion in Saskatchewan as part of its “commitment to develop a world-class potash business in the province.”

A potash price of $300 a ton cuts Citigroup’s valuation of Jansen from $7.2 billion, at a $500-a-ton estimate, to a negative valuation of $2.2 billion, it said.

BHP made a $40 billion hostile bid for Potash Corp. in 2010 as it sought to add production of the crop nutrient. The bid was blocked by the Canadian government. Saskatchewan is the world’s biggest potash-producing region.

BHP may see the move by Uralkali as accelerating a switch to more market-oriented pricing for potash, a process it has encouraged in other commodities such as iron ore, and a development that may bolster its faith in Jansen’s economics.

“This development will affect their decision making process,” Sophie Jourdier, an analyst at Liberum in London, said yesterday by phone. “Obviously a company like BHP looks at a very long-term view and it may be that they come to a decision that they still want to go ahead with this.”

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