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More Potash Coming to an Already Crowded Fertilizer Market

29 Jul 2018 1:00 pm
By James Marson | Photographs by Arthur Bondar for The Wall Street Journal 

BEREZNIKI, Russia -- In the foothills of Russia's Urals mountains, a new potash producer is looking to lay claim to around a 10th of the global market for the fertilizer by the middle of the next decade.

EuroChem Group AG, a maker of nitrogen and phosphate fertilizers, is getting into the potash-mining business, in a move that could shake up a market dominated by a handful of producers in North America and the former Soviet Union.

A glut has kept potash prices weak for a decade, causing other miners to close facilities or put on hold developments and leading the two largest Canadian producers, Agrium Inc. and Potash Corp. of Saskatchewan Inc., to merge last year in an attempt to cut costs.

Closely held EuroChem recently launched its first potash mine, and a second one is set to become operational next year. The new supply will initially feed EuroChem, which will no longer need to buy potash from rivals such as PAO Uralkali. As production ramps up in the coming years, increasing volumes will be sold abroad.

Prices for potash -- one of three major fertilizers alongside nitrogen and phosphate -- have recovered somewhat in the past year or so. But the new production from EuroChem's two mines could smother the market and send prices back down, some analysts said.

Joel Jackson, an analyst at BMO Capital Markets, said demand would need to grow by around 3% a year -- above EuroChem's forecasts -- to absorb the new volumes without knocking off kilter a market where some of the biggest producers carefully match output to demand in order to support prices.

"The market is worried about us coming in, the total volume we can produce," said Tom Luigs, global product manager for phosphates and potash at EuroChem's trading arm.

Mr. Luigs and some analysts played down the potential impact, saying the company was planning to increase output gradually in a way that would meet new demand that he expects from fast-growing markets such as Brazil and Southeast Asia.

"EuroChem should be able to make incremental increases in production without disturbing the markets," said Jonas Oxgaard, an analyst at Sanford C. Bernstein & Co.

The area around Berezniki, a town of some 150,000 about 750 miles east of Moscow, is the hub of Russia's potash industry, the world's second largest. An inland saltwater sea evaporated here some 250 million years ago, leaving behind one of the largest potash deposits in the world, a EuroChem official said.

When EuroChem decided to get into the potash-minding business a decade ago, a commodities boom had driven the price for potash toward $1,000 per metric ton. But the price slumped to around a quarter of that level amid a bust. It was hit again in 2013 when Uralkali exited its partnership with a Belarusian company that, along with a North American trading group, effectively controlled prices. Uralkali ramped up production.

EuroChem, majority-owned by billionaire tycoon Andrei Melnichenko, plowed ahead with the project here, called Usolskiy, and the second in southern Russia, known as VolgaKaliy, which the company says could propel it into the top three fertilizer companies in the world by nutrient capacity.

The efforts are ambitious for a company that not only had never built a potash mine -- a complex and expensive undertaking -- but took on two giant projects at the same time.

EuroChem and analysts said the company had one big advantage: low costs, thanks in part to the fact that deposits are closer to the surface and cheaper to mine than for many rivals, as well as the weak Russian ruble.

"Looking at our peers, our costs are one of the lowest if not the lowest, " said EuroChem's Mr. Luigs. "But we are not going to rock the price down."

At Usolskiy, the ore from which the fertilizer is produced lies around 500 meters (about 1,600 feet) below the surface. Giant mining machines have been lowered down the lift shaft in pieces and reassembled. The machines' metal teeth gouge into the rock -- a mix of red potassium salts, white sodium chloride, better known as table salt, and gray clay. As they drill, they create a maze of tunnels. The mined ore is sent by conveyor belt to a processing plant where it is purified.

There have been some setbacks, including a fire at the processing plant at Usolskiy in December that set the project back two months and problems sinking a shaft at VolgaKaliy that delayed it by nearly three years.

The Usolskiy mine here aims to produce 450,000 metric tons by the end of the year, compared with global output of 65 million tons last year. By the middle of the next decade, the company wants to produce a total of 8.3 million tons from both mines.

Some analysts said that target could be overambitious. "It's not a slight towards EuroChem to be very skeptical of their ability to bring this capacity on the market on time," said Sanford C. Bernstein & Co.'s Mr. Oxgaard.

(END) Dow Jones Newswires

July 29, 2018 09:00 ET (13:00 GMT)

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