Potash price volatility expected

Canada's potash industry could be in for a rocky few years as supply and demand are unlikely to move up and down in unison over the next decade, a report said Tuesday.

Research firm DBRS Ltd. said potash companies are likely to see strong demand over the long term, but profitability may not follow a straight line higher.

Potash is the common name for a variety of water-soluble mineral salts that provide potassium to agricultural crops. It's become one of the world's most sough-after fertilizers due to its ability to increase yields, or, the amount of food produced per acre. Spot prices for potash have more than doubled since 2007.

The potash craze has gotten so feverish that PotashCorp of Saskatchewan — the world's largest supplier — was briefly the most valuable company in Canada last year. (Australia-based BHP Billiton tried to take over PotashCorp in 2010 for $40 billion, but was ultimately unsuccessful as Ottawa rejected the bid as not being of net benefit to Canada.)

Global factors are underpinning the trend. The world's population is growing, and economic growth is fast creating wealthier populations in the developing world, DBRS noted.

"The better off people are, the better they eat," mining analyst Ernie Lalonde said.

Demographic factors are likely to keep potash demand strong, the report said, but the supply side of the ledger could be prone to upheaval as more sources come online.

"New market entrants and increased potash production capacity could lead to swings in industry profitability over the next several years," Lalonde said.

Huge increases in potash prices have other producers scrambling to bring new potash mines to market. It's estimated that world potash production is currently less than 0.3 per cent of the planet's actual reserves. As many new mines start production it could create a supply glut, which in turn could make prices yo-yo.

"If the market structure of the industry changes and margins are driven down, the ratings of producers largely reliant on their potash businesses could be negatively impacted," DBRS warns.

Even with no new players, Canada's two largest potash firms, PotashCorp and Agrium Inc. are already forecast to rapidly increase production over the coming decade. PotashCorp plans to almost double its production to 17 million tonnes by 2015.

"Potash demand can be expected to continue to grow, but it will take appropriate timing, market discipline and perhaps a bit of luck to keep markets in balance," Lalonde said.