BHP's potash demand to hold firm
BHP has been expected to clarify its commitment to a multibillion-dollar potash project in Canada over the next few weeks, but those expectations were rocked on Wednesday by revelations that two large producers would no longer co-operate in an influential sales joint venture.
The split between Russia's OAO Uralkali and Belaruskali of Belarus is likely to see more potash produced, forcing down the price. BHP has been mulling over whether to spend $500 million to $600 million on sinking new shafts at Canada's Jansen potash mine, in the first step of a bigger plan that could turn Jansen into the world's biggest potash mine. Competition for capital within BHP is fierce, and some observers have suggested that Wednesday's ructions in Europe could be enough to deter BHP from committing scarce cash to the project.
BHP declined to comment on Wednesday, but it has long indicated the construction could take several years. This could insulate BHP from any immediate fluctuations in the price of potash.
Deutsche analyst Paul Young said Wednesday's ructions could affect the pace at which BHP developed the project over the next couple of years, but was unlikely to deter the company entirely. "Overall, this shouldn't change their long-term view on potash, and the fundamentals should not have changed on the back of this announcement," he said.
Mr Young and another analyst who declined to be named both noted that BHP preferred to work in commodities that had transparent, market pricing systems, and both said that Wednesday's ructions had helped move the potash sector closer to spot pricing.
The former BHP boss Marius Kloppers was a strong campaigner for transparency in pricing, particularly in the iron ore sector.
Meanwhile, BHP could soon enjoy increased production from its oil interests in the Gulf of Mexico, which were responsible for the company's only missed production target in the 2013 financial year.
BHP's partner in the Gulf of Mexico, BP, told investors the joint venture Mad Dog rig would improve its performance over the next 12 months.
Frequently Asked Questions about this Article…
BHP has been considering a multibillion-dollar commitment to the Jansen potash project and is weighing an initial spend of about US$500–600 million to sink new shafts. Company officials declined to comment, but the work on Jansen is part of a bigger plan that could, over time, turn the project into one of the world’s largest potash mines.
The split between Russia’s Uralkali and Belarus’ Belaruskali is likely to increase potash production and therefore put downward pressure on prices. The article notes that this development could move the potash sector closer to spot pricing and make pricing more competitive in Europe.
Analysts quoted in the article say the European ructions could slow the pace at which BHP develops the project over the next couple of years, but they are unlikely to deter the company entirely. Overall, the long‑term view on potash fundamentals is expected to remain intact.
Yes. BHP has indicated construction could take several years, which may insulate the company from immediate fluctuations in potash prices. That longer timeframe can reduce the impact of short‑term price swings on the project decision.
Moving closer to spot pricing means potash may be priced more transparently and react faster to supply and demand changes rather than being coordinated through long‑term sales arrangements. For investors, that implies prices could be more volatile but also more market‑driven and transparent.
Yes. The article highlights fierce competition for capital inside BHP, and some observers suggested that the European producer split and resulting price pressure could be enough to delay or deter BHP from committing scarce cash to the Jansen project in the near term.
BHP could soon see increased production from its Gulf of Mexico oil interests, which were responsible for the company’s only missed production target in the 2013 financial year. BHP’s partner BP said the Mad Dog rig joint venture should improve performance over the next 12 months, which may help BHP’s overall production profile.
Key takeaways from the article: BHP remains interested in developing the Jansen potash project but faces timing and capital allocation decisions; the Uralkali–Belaruskali split is likely to increase supply and put downward pressure on potash prices; a multi‑year construction horizon could insulate BHP from short‑term price moves; and analysts say long‑term potash fundamentals are unlikely to have changed because of the recent announcement.
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