The pace of mergers and acquisitions is picking up again, and one of the top five listed fertilizer companies Potashcorp has found itself the target of the latest acquisition proposal. Acquisitions make sense for BHP, which has been keen to gain potash capacity, given the long lead times for greenfield mines and relative lack of unexploited reserves. There have been numerous suggestions that BHP intends to bypass the conventional annual contracts under which large volumes of potash are sold, just as it has done in its main iron ore business. However it is likelier to be in BHP’s interest to maintain the status quo for a number of reasons. The current system takes best advantage of the small number of large suppliers and allows producers to optimise prices achieved. World capacity is currently 42 million in K2O tonnes according to IFA. Production had been much lower at 32-33 million K tonnes in 2007-2008, falling to 19 million in 2009. Costs of one of the higher cost producers K+S were 159€/tonne (US$232/tonne) on EBITDA basis in 2008 (254€ or US$/tonne in 2009 due to low volume), compared to average prices of 327-342€/tonne (US$454-500/tonne) in 2008-2009 according to company data. By contrast prices fell and volumes recovered much more quickly for nitrogen and phosphate, whose supply is much more fragmented. High margins achievable on potash would be the main justification for paying a substantial premium over the current valuation of Potashcorp.
[Related product: Integer Focus Report: The Outlook for Potash]
