The Market for Potash

This is a superb BBC news report on the rising demand for and prices of potash.

Potash is shorthand for potassium carbonate - a potassium compound often used in agriculture and industry. Potash is the third major plant and crop nutrient after nitrogen and phosphate and the vast majority of the annual global supply is used as a soil fertilizer. It is a product with virtually no close substitute making the demand insensitive to the ruling market price - the price elasticity of demand for potash is very low and high prices make the product hugely profitable to supply

There are several factors coming together at the same time to explain a rising demand for fertiliser across the world.

Firstly, much of the world’s existing farmland is under-fertilised and the world’s demand for food is likely to grow strongly in the years ahead because of rising global population and the higher demand for meat especially in the developing world. Global population is expected to rise by more than 800 million in the next decade, the majority of which will be people in developing nations living in urban areas.

Keep in mind that it takes about 8kgs of grain to produce a kilogramme of beef - little wonder that there will be increased demand for grains from livestock farmers.

The supply of arable land has come under pressure from urbanisation and a shift of farm land away from food production towards growing bio-fuels. So the long term importance of fertiliser in boosting agricultural productivity is set to rise and this has been a key factor driving the demand for and the price of potash ever higher

On the supply side of the market - global potash supply is limited - only 12 countries around the world supply it with the majority of production flowing from Canada, Russia and Belarus. Canada and the former Soviet Union account for 80 per cent of reserves and two-thirds of production. And Potash Corp on its own is already responsible for more than 20 per cent of global production. All three countries set their supply prices using an industrial alliance - controlling exports and keeping prices relatively high.

Extending capacity in the potash industry is difficult - each potash mine takes at least seven years to build, compared to less than two for other types of fertiliser. One market analyst has been quoted as saying that “Potash has the highest barriers to entry and is found in the fewest countries”. The market is highly concentrated - it is effectively a duopoly

Supply contracts for potash deliveries aren’t listed on an international exchange. But if BHP Billiton is successful in acquiring Potash Corp - it may opt to move the potash market away from the duopolistic cartel that controls prices towards a market-based pricing system where the daily price for potash can fluctuate in spot trading. Whether this leads to higher prices in the medium term will depend on the balance between global supply and demand