Unlike Commodity Potash, SOP Is Not Awash With Mining Capacity

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 |  Includes: CMP, SQM
by: Branson Hamilton

Ample investment capital in the last decade led to a mine expansion binge across most commodity minerals. This created over-capacity even as demand flattened / declined after the "great recession". Potash was affected alongside various metals and this has impacted the stock prices of the major potash providers.

Many investors are unaware that there are two forms of "potash" - one with an over-capacity relative to demand, and another with a completely different market dynamic that favors the miners.

The bulk commodity called "Potash" is the mineral Potassium Chloride. It is primarily mined underground in Canada, Belarus and Russia and sold by companies including the Uralkali Group (Russia), Plymouth, Minnesota-based Mosaic (NYSE:MOS), Canada's Agrium (NYSE:AGU) and Potash Corp. of Saskatchewan (NYSE:POT), Germany's K+S AG and U.S.-based CF Industries Holdings (NYSE:CF). Between them they control approximately 80% of the bulk commodity potash market. Millions of tons are produced each year that are spread on the soil of land producing corn, soybeans, wheat and other high-volume crops. This is the "potash" that has an over-capacity of mining relative to current demand. Experts in agricultural economics agree that demand will increase to absorb the capacity over the next few years, but meanwhile investment in this space is challenging.

Meanwhile, there is another mineral with "potash" in its name, the specialty fertilizer mineral Potassium Sulfate, also known as sulfate of potash or "SOP". Potassium sulfate is not abundant and is definitely not in a mine-capacity over-supply situation. In fact, the market dynamics for SOP are quite favorable for the natural producers of this important fertilizer.

Potassium is an element critical to crop growth. Without replenishing the soil with potassium that is used by crops as they are growing, yields and quality of harvests decline. Potassium affects water uptake by plants and is important to processes that grow the harvested part of the plant, the vegetables, fruit, nuts and grain seeds. This is a fact of nature and there is no substitute for potassium.

SOP provides potassium to growing plants, as does the commodity mineral known as Potash with four very important differences. These differences mean that the supply economics favor SOP.

First of all, SOP does not contain chloride as does regular potash.

The chemical composition of regular potash is potassium chloride. The chloride ion can be toxic to some crops, and negatively affects soils in many regions of the world. Many high value crops including fruits, nuts, tea, and tobacco are negatively affected by regular potash. Regular Potash can make soils that are already saline or with inappropriate pH even worse. For example, in large regions of Brazil, for each ton of regular potash that is applied, an equal ton of limestone must be applied to offset the effect on pH. Unlike potash, SOP has no chloride ion in it, and therefore can be used on high value crops and in these poorer soil types. The demand for SOP continues to grow from developed and developing nations.

Secondly, the demand for SOP far exceeds current and projected future mining capacity. Naturally extracted potassium sulfate is actually rather rare. There are only four known places on earth where this form of the nutrient is found naturally: at the Great Salt Lake in Utah; on the Atacama desert in South America; at the Luobupo project in Xinjiang, China; and at the Sevier Lake in Utah. Each of these sources use evaporation of lake brine as the source. However, these sources can supply only 20% of the demand for the fertilizer. Approximately 80% of SOP demand is produced by a chemical process that converts potassium chloride to potassium sulfate by using sulfuric acid. K+S Aktiengesellschaft (DU:SDF), a European fertilizer/chemical company, is a significant supplier of this converted SOP. Demand far-exceeds the natural supply; there will never be an over-capacity in mining SOP.

Third, the higher-cost chemical conversion process puts a floor on the price of SOP.

The chemical conversion process is much more costly than is extracting the natural product. In fact, the cost of the process forces a selling price for SOP that is more than three times the mine-produced SOP's cost of production. This conversion cost is dictated by the cost of the raw materials, energy required and the process. Therefore, the market price of SOP cannot be less than the conversion process costs or the suppliers of 80% of the world demand could not stay in operation. This guarantees high operating margins for the suppliers of natural SOP regardless of market conditions.

Fourth, SOP provides sulphur to the soil as well as potassium; regular potash does not. Sulphur has been shown in many tests to be both necessary to plant growth, and to be available in lower amounts in soils than is optimal for many crops. Sulphur augmentation of soils has been common for certain high-value crops. Recent studies show that with the reduction in sulphur emissions from coal-fired electric utilities in the United States over the past two decades that soil in the Corn Belt is beginning to require sulphur augmentation to achieve optimal harvests of even bulk crops like corn and soybeans, crops thought to not be affected by sulphur levels before. SOP provides sulphur in a form that is more readily absorbable by plant roots than traditional forms of sulphur fertilization. Regular potash does not provide sulphur, SOP does.

So how do you play the SOP space? Two ways: the volume leader or the natural producers.

The Primary Chemical Conversion Producer

K+S Aktiengesellschaft (DU:SDF) is the largest supplier of SOP from its chemical convergence operations in Germany. Its stock trades on European exchanges. K+S supplies much of the SOP consumed in Europe, Central Asia and the Middle-East. K+S also supplies other fertilizer products, so it is not a pure play in SOP. Because K+S uses a chemical conversion process to produce SOP it does not have the margin opportunity of the producers of naturally extracted SOP. However, K+S is well positioned with respect to distribution and location to market to continue its long-term franchise in this space. See http://www.k-plus-s.com/en/ for more information.

Four Natural Sources of SOP

Sociedad Quimica Y Minra (NYSE:SQM) has its operations in Chile on a high- altitude brine lake in the Atacama desert. SQM produces other minerals besides SOP including lithium, however natural fertilizers is its primary business. It continues to invest in additional capacity and has distribution to South American markets as well as to global markets. SQM should be considered for longer term growth. Additional information can be found at http://www.sqm.com/.

Compass Minerals International, Inc. (NYSE:CMP) has brine extraction operations on the Great Salt Lake in Utah, United States that includes over 16 square miles of evaporation ponds and is intending to obtain rights to expand their operations on the lake. Compass produces SOP, magnesium chloride and salt from the Great Salt Lake. In addition, Compass has unrelated operations and divisions elsewhere in the U.S. and U.K. Third quarter financial results for each have been good, and Compass has distribution to U.S. markets as well as contracts in global markets. Compass should be considered for longer term growth. Additional information can be found at http://www.compassminerals.com/.

Investment in the Luobupo project in Xinjiang, China is not an option for investors. Ownership and production remain within China.

The resource on the Sevier Lake Playa in Utah is under development by EPM Mining Ventures, Inc. This project intends to produce SOP. Additional information on this project can be found at http://epmmining.com/cms/ .

There are other proposed mining projects in the U.S., in South America and in Africa. These are intending to produce potassium chloride, not SOP. Therefore, they will be competing with the major potash producers in a market that has more than sufficient capacity today. These are not opportunities to participate in the SOP market.

Companies mentioned: POT MOS AGU CF SDF SQM CMP

Notice:

Opinions expressed in this article by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.