Markets: BHP's potash price surprise

Morgan Stanley says lower prices could trigger demand growth, and thus encourage BHP Billiton to continue its potash push.

Morgan Stanley’s Brendan Fitzpatrick doesn't expect BHP Billiton to give up on potash.

OAO Uralkali, the potash producer that suspended a venture controlling almost half the global exports of the commodity used in fertiliser, may drive potash prices down to $US300 a tonne, says Fitzpatrick. That means BHP’s Canadian potash venture, Jansen, would become cash flow negative, as the break-even price for the project is $US390 a tonne.

A few potash supply contracts that set global benchmark prices are typically settled annually. The last accord signed for sales in China by Belarusian Potash Co – which is responsible for 40 per cent of the world’s potash exports – was at $US400 a tonne.

Morgan Stanley says BHP’s Jansen potash project has a discount cash flow value of $US2.3 billion ($2.55 billion), based on capital spending of $US19 billion and a potash price of $US435 a tonne.

“With the decline in potash price expectations, Jansen is now net present value negative,” says Fitzpatrick.

“This does not mean the potash market has become fundamentally unattractive. To the contrary, longer term, a lower price could trigger more demand growth. Therefore we expect BHP Billiton to continue to pursue this market.”

Fitzpatrick says BHP’s board will probably delay a final decision on Jansen.

“We expect it may approve another block of capital, most likely less than $US1 billion, to continue sinking the two shafts at Jansen and possibly look for potential partners to share the project risk and get value recognition for the resource and infrastructure,” he says. “But such a process is likely to slow if potash prices fall.”

At 1218 AEST BHP Billiton shares were up 24 cents, or 0.7 per cent, to $34.88. The stock has fallen 6 per cent since the start of the year but is up 9.2 per cent over the last 12 months.

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