WINNIPEG, Manitoba Two of the world's largest miners have delayed decisions on whether to dig for potash in the Canadian province that holds the world's richest reserves of the crop nutrient.
Short term, global capacity to produce potash easily exceeds demand and the gap is growing. But the long run looks considerably more promising, with world demand for food expected to soar with population growth.
With that in mind, Australia's BHP Billiton (BLT.L) (BHP.AX) and Brazil's Vale SA (VALE5.SA) have delayed approval of developing mines in Canada, but have not wiped them off their drawing boards.
Both miners are under pressure from economic uncertainty and collapsing metals markets, and short-term potash prospects look mixed.
As Canpotex Ltd, the offshore marketing agency for potash mined in the Western Canadian province of Saskatchewan, negotiates new supply deals with China and India, North American supplies have swollen to one-third larger than the five-year average.
As a consequence, there's no need to rush new supplies to market.
"We've turned on the downside of the cycle now," said David Asbridge, president of NPK Fertilizer Advisory Services in St. Louis, Missouri. "But longer term, the demand is going to be out there."
As of last year, the global potash industry had 70 million tonnes of operating capacity and 45 million tonnes of demand, leaving a surplus of some 25 million tonnes, according to the International Fertilizer Industry Association, which does not factor in industrial uses for potash.
That excess capacity looks to nearly double to a potential 46 million tonnes by 2016 as capacity grows faster than demand, assuming three new mines open.
Top potash producers in Canada, Belarus and Russia manage supply-demand fundamentals carefully by idling production to support prices as they work via marketing agencies Canpotex and Belarussian Potash Co.
But such a large surplus in capacity could become more worrisome as new competitors, which are likely to sell the nutrient directly to customers, enter the market.
SASKATCHEWAN FEARS PRODUCTION TO HIT PRICE
In Canada, Potash Corp of Saskatchewan (POT.TO) (POT.N), Mosaic Co (MOS.N) and Agrium Inc (AGU.TO) (AGU.N), which jointly sell Saskatchewan potash offshore through Canpotex, are expanding their mines. Germany's K+S AG (SDFGn.DE) has also broken ground on a 2.86-million tonne Canadian mine.
As well, there are several other early-stage plans for new mines owned by small, capital-poor companies and one jointly owned by mining major Rio Tinto Ltd (RIO.AX) and Russia's JSC Acron.
So many potential projects give pause even to ribbon-cutting politicians.
Saskatchewan, a farming province of 1.1 million people, generates hundreds of millions of dollars most years through a complex royalty formula that gives more weight to the crop nutrient's price than its production levels.
That formula may need to change to avoid a massive boost in production, and a resulting price drop, short-changing the province's coffers.
"We're not talking about a review or a drive to see increase in that tax ... (but) I think we need to look at potential adjustments to see in the long term what this added production will do to the revenue picture," Saskatchewan Premier Brad Wall said in an interview with Reuters.
Saskatchewan holds 40 percent of the world's potash reserves.
Rabobank has also warned recently about too much potash.
Surplus capacity will range between 59 and 100 percent of demand by 2020, depending on how many new mines open, the bank said in late June. The possibility of potash importers - China, Brazil and India - investing themselves in overseas or domestic mines would further dampen prospects for existing players.
INDIA DEMAND WEAK
A break in potash buying during the second quarter by India, one of a quartet of key importers along with China, the United States and Brazil, isn't helping mining CEOs feel comfortable ploughing billions into new mines.
Potash prices in India have nearly doubled in the past 18 months, largely because of a weak rupee and the government slashing its potash subsidy to arrest its rising fiscal deficit, leading farmers to use less of the nutrient rather than pay more.
Consumption is falling due to higher prices and it will likely recover only modestly in the near term, said a senior official at Fertiliser Association of India (FAI), who declined to be named.
"Unless prices fall sharply in the world market or government decides to raise (the potash) subsidy, we can't see considerable improvement in demand," the official said.
The biggest variable in the mixed short-term outlook is the worst U.S. drought in 56 years.
Scorched U.S. crops have sent corn and soybean prices soaring, giving the world's farmers incentive to plant more of those fertilizer-intensive crops, starting with South America this autumn, Potash Corp has said.
Even so, with lower U.S. production this year, soils in the United States should retain more of their crop nutrients.
"We're not going to need to put a whole lot of P (phosphate) and K (potash) on the soil for next year's crops," NPK Fertilizer Advisory's Asbridge said.
LONG-TERM OUTLOOK BULLISH
But no short-term capital crunch or crop disaster changes the reality that the global population may be headed toward 9 billion people by 2050. And the world isn't producing enough food to comfortably withstand a major disruption to grain supplies - as demonstrated by the market impact of this year's droughts in the U.S. Midwest, Russia and South America.
The Food and Agriculture Organization of the United Nations has said that due to both a rising population and rising incomes in some countries, production of cereal crops will have to jump considerably to match demand, mostly by improving yields.
Potash helps plants develop strong roots and retain water, boosting yields and helping them resist disease and insects.
Indian fertilizer companies this year are in good negotiating position with suppliers, said Tarun Surana, analyst at Sunidhi Securities & Finance in Mumbai, but India will remain dependent on potash imports for the foreseeable future. "Had there been any potash reserves, the country would have started mining by now," Surana said.
Mindful of that bright long-term outlook, BHP continues to work, slowly, on building the world's biggest potash mine in remote Jansen, Saskatchewan, despite putting off a final decision until mid-2013.
"We continue to think that potash is a very good product for the long term," said BHP Chief Executive Marius Kloppers on an earnings conference call last week. "I mean, we think that participating in the food production chain in an area where our core skill set fits is something that we would like to do over the next couple of decades."
(Additional reporting by Rajendra Jadhav in Mumbai; Editing by Frank McGurty; and Peter Galloway)