The decision by the world's largest potash producer to quit a marketing cartel has called into question BHP Billiton Ltd's plans to spend up to $US15 billion ($A16.6 billion) expanding potash production.
Russia's OAO Uralkali announced overnight it would quit the Belarus Potash Company (BPC) joint venture with partner Belaruskali, a move that Uralkali said it expects will slash potash prices by 25 per cent. The joint venture controlled some 43 per cent of global potash exports.
A sharp drop in potash prices would ultimately stand to benefit heavy fertiliser users, but could spark the cancellation of planned potash projects. BHP's potash plans were centred on the Jansen project in Canada, which it had dubbed as having the “potential to become one of the world's premier potash mines”.
The Jansen mine would cost up to $US15 billion to build, and had been called by BHP chief executive Andrew Mackenzie “a great option, but it's just an option”. Citigroup Inc analyst Heath Jansen wrote in a note to clients that the move “could be a game changer” for BHP's Jansen project, according to Bloomberg News.
“Uralkali appears to have started a price war,” he reportedly added. “We would argue that the risk reward of proceeding with the project is moving toward not proceeding.” BHP has said it sees potash as the next key focus in its business, joining copper, iron ore, coal and petroleum production.
However, Potash Corp of Saskatchewan chief executive Bill Doyle said in May that the Jansen mine economics “don't work”. BHP made a failed bid for Potash Corp in 2010. Uralkali said it expects its change in policy could push potash prices below $US300 a tonne, which would be at least 25 per cent below the current contract price for China.
If potash prices do slide to $US300, Citigroup's valuation of the Jansen project would be slashed from $US7.2 billion, which was based on a $US500 a tonne estimate, to a negative valuation of $US2.2 billion, according to Bloomberg.