INSIGHT: Seed money - The growing SOP fertilizer market

Author: Andy Hemphill

2019/07/29

LONDON (ICIS)--The global sulphate of potash (SOP) fertilizer market is slow to change - like its sister, and far larger, muriate of potash (MOP) counterpart. However, the past few years have witnessed the emergence of two regional sources of SOP which have the potential to redraw the international supply/demand map.

These two prospective potash powerhouses could not be more different, with one springing from the boiling sands of western Australia’s Outback, and the other from China’s giant agricultural economy.

GROWING STRONG
‘Potash’ is an umbrella term used for fertilizers with a high potassium content. The most common form is MOP, which is suited to mass-produced crops such as rapeseed.

MOP accounts for 95% of global potash trade, amounting to around 69m tonnes/year. The SOP trade is far smaller, at 7-8m tonnes/year. SOP is a chloride-free fertilizer suited to high-cost products like tobacco, fruit and some vegetables.

SOP can be produced through the Mannheim process - which reacts MOP with sulphuric acid - or via brine extraction.

China’s focus is on Mannheim production - although Beijing’s environmental and pollution legislation has tightened in recent years, leading to an explosion of brine extraction projects in the country’s northern reaches.

Meanwhile, brine extraction is the choice of Western Australia’s five biggest SOP prospectives.

Extraction draws salt-rich water from beneath dry lake beds or inland seas, which is then evaporated to leave salts. This salt is then processed into SOP, and shipped around the world.

Of the two suppliers, China undoubtedly has the advantage.

TARIFFS AND TRIBULATIONS
Beijing surprised the long-established international potash trade by announcing the lifting of export tariffs on Chinese SOP, effective 1 January 2019.

Already a large producer of SOP, the move potentially opened the floodgates for a deluge of refined SOP to hit the international market - although early export statistics were less than impressive.

Of course, it wasn’t long until gradually increasing volumes of Chinese SOP were seen in international markets - and this is a trend set to continue, even as the nation retires older Mannheim furnaces.

Top Ten China SOP exports, January-May (tonnes)

Country 2017 2018 2019
Iran 480 0 61,190
Mexico 0 0 14,898
Myanmar 439 118 12,748
Pakistan 582 0 6,467
South Africa 1,964 0 6,377
India 0 1,015 5,741
Chile 0 0 5,143
Peru 0 0 4,183
Japan 381 0 3,308
South Korea 199 149 2,492
World 6,675 2,638 145,574

Source: Trade Data Monitor

In January-May this year, Chinese SOP producers shipped more than 145,000 tonnes of the high-potassium fertilizer around the globe, with the largest volume heading to Iran.

A source at one major European producer says: “In a market as small as SOP, at 7m tonnes/year demand, even [140,000] tonnes from a new location can upset the balance.”

It is unlikely that China will stop upping international shipments, if the government keeps export tariffs at zero.

“[Chinese tonnes] are definitely putting more pressure on the market. We’re not yet seeing Chinese tonnes in Europe, but in other parts of the world. It’s only a matter of time, though,” the source adds.

That said, while fear of China’s agricultural power is rightly placed, global SOP demand is increasing overall, thanks to high-intensity farming and a growing population. This in turn leads to hopes that increased SOP supplies from China will be absorbed over time.

China’s domestic SOP consumption is also considerable, as tobacco is widely grown and particularly SOP-hungry as a crop; so exports may yet be lighter than expected.

TAMING THE OUTBACK
Meanwhile, to the far south of China’s shores, in the Australian Outback, five SOP prospectives continue to compete to be first to market with high-grade fertilizer harvested from the region’s underground, salt-rich brines.

Of the five - Salt Lake Potash, Kalium Lakes, Australian Potash, Agrimin and Reward Minerals, three are arguably pulling ahead, having locked in off-take agreements for their as yet unmined resources within the last year.

However, despite this investor-pleasing news for Salt Lake, Kalium, and Australian Potash, none of the five is yet to begin actively producing SOP in bulk, and all are still at relatively early stages of development.

Developmental SOP producers in Western Australia

Company Claim / Area (km²) Estimated SOP resources (tonnes) Offtake agreements
Salt Lake Potash Goldfields / 3,300 290m-458m 50% of all production to China’s Sinofert.

50% from 50,000 tonne/year demonstration plant to Mitsubishi.

Kalium Lakes Beyondie / 2,400 180,000 tonnes/year over 30-50 years 75,000 tonnes/year to German MOP major K+S, 10-year term.
Australian Potash Lake Wells / 1,200 14.7m over seven years MOUs with China’s Sino-Agri and Hubei-Agri for up to 200,000 tonnes/year
Agrimin Lake Mackay / 4,370 426,000 tonnes/year over 20 years None confirmed
Reward Minerals Lake Disappointment / 5,000 9m tonnes over 25 years None confirmed

Also of paramount concern for the five firms is the sheer distance involved in transporting SOP from inland Australia to ports at the coast.

Australian Potash and Salt Lake are both using rail connections from the railhead outpost of Leonora - although this requires a truck journey of 280km (174 miles) and 111km, respectively, before material can be loaded on railcars.

From there, the companies will ship SOP to the coastal ports of Fremantle, Esperance and Geraldton.

Reward, Agrimin and Kalium, meanwhile, will stick to the roads, with each considering routes of up to around 10,000km from salt lake to port.

Add to this the cost of production, wages, and housing for workers in some cases, and the five companies’ claims of being low-cost operations could be called into contention.

Indeed, it may be difficult for investors to choose between them.

“Logistics and marketing,” Matt Shackleton, executive chairman of Australian Potash, told ICIS last year.

“These are the key to a successful operation. Banks won’t back you if you don’t have a good plan, and they’re asking themselves: ‘who is going to be moving the product cheapest?’”

That is sure to be the question prospective buyers will also be asking themselves - especially now that China is in the market, and with tonnes ready to ship.

However you look at it, supply/demand dynamics will soon shift in the global SOP trade - and wily legacy producers will need to prepare to fight their corner.

By Andy Hemphill.