Sinochem likes Potash Corp

by PlanMaestro

The announcement is not very much of a surprise

Sinochem, the Chinese-state owned chemical group, said on Friday it would “pay close attention” to BHP Billiton’s $39bn hostile bid for PotashCorp, and added that it was “interested in overseas potash investment opportunities

Given the confrontational history of BHP with Chinese government companies, this is only just one more chapter in the battle for control of key natural resources supporting the fast growth of the emerging economy.  More interesting is the description of the distribution monopoly used to control prices and provide a stable supply of fertilizers in China.

PotashCorp has strong links with China, the world’s biggest fertiliser importer. The Canadian company owns a 22 per cent stake of Sinochem’s listed subsidiary Sinofert, China’s biggest fertiliser maker and distributor and the country’s biggest importer of Potash. PotashCorp is a leading member of Canpotex, a cartel system that Chinese buyers favour because it ensures reliable annual prices….

… China considers agricultural self-sufficiency a matter of national security, but only produces enough potash to cover about half of its fertilising needs. The country also favours the current system of annual price contracts for potash. BHP has suggested it would shake up the nearly 40-years-old potash pricing system

… Sinochem is China’s largest fertilizer distributor, and until 1998 held a government monopoly on fertilizer imports. Sinofert on Friday handles all of Sinochem’s fertilizer business, running 2,000 distribution centers throughout China. The subsidiary was listed on the Hong Kong stock exchange in 2005, and now has a market cap of HK$30bn.

This possible shake up is similar to the negotiations with BHP over iron ore. The Chinese are not standing still and they are moving to expand fertilizer capacity and access

Sinochem has been hungry for agribusiness opportunities abroad, but was humbled last year by its failure to secure a deal with Nufarm after six months of talks. After the Australian firm accepted a rival Japanese bid, Sinochem vowed to “continue to strengthen our co-operation with the world’s agrochemical enterprises and unswervingly push forward the globalization of our agrochemical business.”

China has been aggressively expanding the country’s domestic potash production, with output doubling between 2005 and 2009. China’s potash demand was 7.9m tonnes last year, down from a 2007 peak of 11.93m tonnes, said Wang Ling of China Fertilizer Market Week.

Some of you may ask why this interest in potash. Well, fertilizers is an industry close to my heart despite some people’s opinion that it is “by and large, an unexciting business” (Heidi Moore, WSJ). One person’s fish eggs are another person’s caviar. Non renewable limited resources, high barriers to entry, controlled by a few players can be a road to riches. Also, I stumbled upon one potash opportunity while researching mining stocks and with all the M&A hoopla might be time for a deep analysis. If readers have recommendations in the phosphate or potash industries I would gladly take a look.