x Abu Dhabi, UAETuesday 25 July 2017

End of potash cartel should reduce food prices in Arabian Gulf

The potash cartel is busted. Given the mineral’s vital role as a fertiliser, that should lead to lower prices for groceries in the Arabian Gulf. We explain why.

At the Mosaic Potash Colonsay mine in Saskatchewan, drilled potash is carried up to the surface on a conveyor belt. It is then processed into a usable product. David Stobbe / Reuters
At the Mosaic Potash Colonsay mine in Saskatchewan, drilled potash is carried up to the surface on a conveyor belt. It is then processed into a usable product. David Stobbe / Reuters

For the Arabian Gulf states, heavily dependent on food imports, the Byzantine manoeuvrings in the potash industry could spell relief from steadily rising prices.

Potash is not a particularly glamorous mineral, but plants love it. It is essentially a fertilizer form of the element potassium, and is vital to organic life. Potash can turn sterile desert into fields of green. Countries such as Jordan that have large deposits of the mineral have used it to create agricultural industries that simply could not exist otherwise.

It was also, until recently, controlled by a handful of companies that jealously guarded its price and ensured farmers paid a hefty premium for it. That, however, is about to change. In late July, the Russian fertilizer giant Uralkali set in motion one of the biggest setbacks to hit mining in years. It pulled out of its trading partnership with the Belarus potash producer Belaruskali, a cartel-like arrangement that had the same effect on the global fertilizer market as Opec does on the price of oil. Together, they controlled 70 per cent of the potash market.

The Russians wanted price stability, but Belarus, which draws up to 20 per cent of its national income from the cartel, wanted higher prices. The tension came to a head in July when Russia accused Belarus of selling product outside the cartel.

Uralkali left no doubt what the effect of exiting the cartel would be: it said it expected the price of potash to fall 25 per cent, to around US$300 a tonne. Belarus’s response was to invite Uralkali’s chief executive, Vladislav Baumgartner, to Minsk for talks – and then arrest him moments after his feet hit the tarmac. He is still languishing under guard in the Belarus capital.

As potash accounts for up to 25 per cent of farming input costs, the knock-on effect on food prices from these events is significant.

Up to now, many farmers, especially in emerging nations such as India – also a significant supplier of food to the Arabian Gulf – have simply done without. This has led to lower harvests and higher prices.

“Demand growth has been stemmed by pricing behaviour in recent years ,” says Paul Burnside, manager of fertilizer analysis products at CRU, a London-based consultancy. The break-up of the cartel should lead to a price fall, with farmers standing to benefit. “This move should allow demand growth to return,” Mr Burnside notes.

Lower potash prices should put downwards pressure on food prices – good news for Gulf countries. In a report in May, Alpen Capital warned that the region was vulnerable to food price shocks.

The end of tight price management over a vital food input will reduce that risk.

Gulf states also stand to benefit in another way. Price competition should stimulate potash demand, and with it, investment in the sector – especially in emerging producers in Africa. Countries such as Ethiopia are eager to develop unexploited potash reserves.

“African projects have relatively modest capital expenditure, and also pretty good operating expenditure, when you factor in the cost to deliver to target markets,” Mr Burnside says.

In recent years, Gulf companies have acquired large tracts of land in Africa as a hedge against food insecurity. To produce the fertilizer for these farms, a number of potash mining projects are under way across the continent.

One such project is being run by Allana Potash, a Canadian junior developing four concessions in Ethiopia’s north-eastern Danakil Depression. The $642 million project stretches over 312 square kilometres. Work on the development is forging ahead and production is set to begin within two years, said Richard Kelertas, Allana’s senior vice president of corporate development.

“We are full steam ahead,” Mr Kelertas said. “As a very low cost producer – by 2015 – we are in very good shape and well positioned to get our project fully financed and built.”

Other emerging markets are also set to benefit. “This likely will kick-start a positive demand response out of India, China and in many other regions” Mr Kelertas said.

For Ethiopia, the stakes are especially high. Once the symbol of African deprivation and want, it now has a thriving, if tiny, economy. The country depends on agriculture but the government is eying mining – currently less than 1 per cent of GDP – as a central plank to development. Potash shows plenty of potential.

“The deposits in the Dankhil Depression are likely the lowest production cost deposits on Earth because the extremely hot and dry climate is ideal for solution mining,” says the University of Michigan’s Gabe Collins, a researcher into Ethiopia’s trade links with China. “To boot, the area appears to have a rechargeable aquifer that can sustain mining operations.”

Mr Collins says that Ethiopia could become the world’s cheapest source of potash. It is also the closest large volume seaborne supplier to India, China and emerging African agricultural markets – all major food sources for the Gulf. With proper rail infrastructure it might be possible to deliver potash to global markets such as Brazil – another big buyer – more cheaply than Uralkali can from its mines in the Russian interior, he notes.

With ample fertilizer reserves and an eager market on its doorstep, Ethiopia is in a position to shrug off its image as a symbol of world hunger, and help feed the world instead.

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