Potash prices surge as demand for fertiliser continues

Contract prices agreed for the sale of potassium chloride or potash have more than doubled in the last eight months. Potash is the most common source of potassium used in general application mixed fertiliser, known as N-P-K (Nitrogen, Phosphorus, Potassium). The three chemical elements contained in N-P-K fertiliser are essential for plant growth. When applied correctly, N-P-K fertiliser increases crop yield and quality.

At present there is a global need to step-up food production. According to UN estimates, global population has more than doubled since 1950, reaching 6.6bn people. At the same time, consumption habits have changed. As incomes rise in the developing world, a higher proportion of the world's population moves towards diets with a higher dairy and meat content. This is more costly in food production terms than the requirements of a mainly vegetarian diet. Biofuel schemes have also encouraged farmers to move land out of food into fuel-based production. These factors are all contributing to the rising cost of food, and the growing need for agricultural intensification.

Potash demand has increased by 25% in the last seven years, and is forecast to grow by 4-5% worldwide in the years to 2014. However demand is increasing faster than this in emerging markets. Some agricultural land in India and China, for example, is already being triple cropped, and needs enhanced chemical inputs in order to maintain or increase production.

The situation leaves the world's potash producers with a strong hand. Known potash deposits are concentrated in relatively confined areas of Canada, Russia and Belarus. Production is based in the hands of a small handful of companies. Most product is deep mined, with the costs of bringing new facilities on stream estimated to be high ($2bn for a facility with 2 million tonne output pa), with long lead times (five to seven years). The potash export trade is also relatively concentrated.

According to Charlie Awdry, Materials Analyst and Manager of Gartmore's China Opportunities Fund, key buyers in emerging markets are under pressure to agree to significant price increases in order to ensure supplies. "Evidence from the contract market suggests that India is attempting to strike agreements with potash exporters before Chinese companies", says Mr Awdry. "Recent agreements with Russian suppliers show potash contract prices have reached USD 625 per tonne. Contracts signed in June last year were agreed at under USD 300 per tonne."

These increases will benefit major global suppliers such as Uralkali of Russia, a company which controls a large potash resource and already has notably high margins. The Gartmore Emerging Markets Opportunities Fund has an off-index position in Uralkali, which helped portfolio returns in the first quarter. The Funds also have exposure to Brazilian mining company CVRD, which is a small but important regional supplier of potash. Gartmore's SICAV Latin America Fund has an established agri-pharmaceutical strategy in place, with stakes in the Brazilian fertilizer producer Fertilizer Fosfados and Quimica Y Minera of Chile. Shares in the latter reached a new record in April 2008. The inclusion of Chinese fertiliser producer Sinofert in Gartmore's China Opportunities Fund also aided performance in the first three months of 2008. These positions are, in effect, a direct play on agflation.