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BHP to speed up Jansen development as potash demand to double by 2040

While BHP’s (ASX, NYSE:BHP) (LON:BLT) new chairman doesn’t assume the role until September, pressure is already mounting on Ken Mackenzie, who supports plans to grow the firm’s potash business to the size of its iron ore division.

The world's largest mining company by market capitalization restated Monday its intentions to entering the crop nutrient market by accelerating its almost $13 billion Jansen project in Canada’s Saskatchewan.

"Potash demand sits at the intersection of inexorable mega trends ranging across demographics, economics, diet and the environment. For the producer of any commodity, such an intersection is exactly where you want to be." — BHP's Paul Burnside.

BHP believes demand for potash could double by the late 2040s, by which point it would be a $50 billion market. “That’s one of the reasons why we’re investing counter-cyclically to give ourselves the option to add it to our diversified portfolio of commodities,” said Paul Burnside, potash principal at BHP, in a blog post on the company’s website.

The Melbourne, Australia-based miner had already said in May it could seek board approval for the Jansen mine as early as June next year, which would allow it to begin a $4.7 billion first phase of production as early as 2023.

To date, BHP has committed a total investment of $3.8 billion to move Jansen into production. From that total, $2.6 billion have been set aside for surface construction and the sinking of shafts, though analysts predict the total cost will be close to $14 billion.

Prices for the crop fertilizer ingredient, however, are not favourable — they are still hovering around $230 a tonne, less than half what they were only five years ago.

Besides, BHP’s iron ore business brings in about $9 billion a year, which doesn’t look like an easy target to match by any other division, particularly by potash, given current prices.

But the company is looking long-term and has repeatedly stated it believes rising demand for fertilizer in growing nations, particularly China and India, will lead to a long-term price increase for the commodity.

“The basic rationale for rising potash consumption is quite simple,” wrote Burnside. “Not only is the total population continuing to grow, but at least three billion people are expected to join the global middle class by 2030.”

He also threw in some persuasive numbers:

More than 90% of the global demand for potash comes from agriculture and around 55 million tonnes of potassium chloride is applied as fertilizer annually. That is equivalent to 6kg per tonne of crop production, 40kg per hectare of harvested land or 7kg for each person on the planet.

Experts are not so sure. Sydney-based Deutsche Bank AG analyst Paul Young told BloombergMonday that BHP’s bet on potash was a “highly contentious topic and project.” He noted the market continues to be severely challenged, adding it may not improve for at least five years, as there is plenty of spare capacity in the industry.

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