CLIMATE SPECTATOR: BHP's fertile ground

BHP Billiton's $US38.6 billion ($A43 billion) offer for Potash Corp, the world's largest fertilizer company, has been years in the planning. Not only is it an attempt to diversify its core interests away from the mining of minerals, it's a major bet that rising food demand, combined with the dramatic climate and weather events that are spoiling agricultural production around the world (and improving it elsewhere), will cause a significant growth in the use of fertilizer.

Potash's own website gives a clue as to what BHP Billiton is pursuing here:

"Fertilizer has become increasingly important as conditions challenge farmers throughout the world: There are more mouths to feed. Population has more than doubled since 1950 and is expected to grow from 6.7 billion to 9.2 billion by 2050. With that growth comes even greater demand for food.

"More people are eating meat. As incomes rise in developing nations, millions of people are switching from starch- to protein-based diets. Every pound of beef requires seven pounds of grain to produce, and this has a substantial impact on grain demand. 

There is less farmland available per person. Urbanisation and population growth are shrinking available farmland. By the year 2020, the land available per person is expected to be less than half that of 1950. Crop yields are low in many growing regions. Historical under-application of fertilizer has low yields in countries like China, India and Brazil. With demand for grain rising throughout the world, the need for fertilizer – especially potash – has never been greater.”

The broader strategic issue over food supply and climate change was underlined in a recent report by HSBC, drawing together the implications of the Russian crop disaster, excess rain threatening harvests in Canada, the floods in Pakistan, and the subsequent 50 per cent spike in global wheat prices, the most dramatic for three decades.

HSBC noted that global agricultural markets have become extremely volatile. Climate change is likely to increase the frequency of extreme weather events such as heatwaves, flooding, and droughts, with knock-on implications for food output – and this would be combined with higher transportation costs, and soaring prices for fertilizer.

"It underlines the need for countries to introduce assertive policies to build agricultural resilience over the coming decade,” HSBC wrote. "The urgency is even greater for developing countries outside the G-20, and who funds this adaptation will be a key priority at the climate negotiations in Cancun this December.”

Analysts in the US believe BHP Billiton has been eyeing an entry into the fertilizer industry for around a decade. Earlier this year it made a smaller purchase and has been developing its own new potash mining project. This acquisition simply allows it to dominate the business from the get-go.

But it can expect that its biggest mining rivals, Rio Tinto and Vale, are thinking along similar lines and could table rival offers. Potash itself will be seeking rival bids. Knowing that a takeover is probably inevitable, it's main ambition is to prevent a "steal” of the company.

It's not the first sign of corporate activity in the sector. Just a few months ago, CF Industries bought a North American rival, Terra Industries, after shaking off rival bids from Yara and Agrium; and Russia has been consolidating its potash industry into a single corporation, under the tutelage of billionaire Suleiman Kerimov, that would rank as the world's second biggest producer behind Potash Corp.

Nor is it the first the first time that a $40 billion-plus acquisition of a North American corporate major has been contemplated by an Anglo-Australian mining group conscious of the implications of climate change on its future business. Rio Tinto's $44 billion purchase of Alcan was at least partly driven by the target's supply of emission-free hydro resources to power its energy-hungry smelters. At least BHP might have better luck than its rival in picking the right part of commodity cycle curve.

This article first appeared on Climate Spectator on August 18.