As all eyes look to China for a possible competing offer for PotashCorp , the country’s fertiliser needs are increasingly in the limelight.

Sinochem, the chemicals group that also handles China’s potash imports through its subsidiary Sinofert, has said it is paying “close attention” to the progress of BHP Billiton’s $39bn hostile offer for the Canadian fertiliser producer.

Underlying this interest is a mineral that China relies on to fulfil a goal considered paramount to national security – self-sufficiency in grain production.

China is critically short of potash, and increasingly relies on the mineral as urban growth shrinks arable land and Beijing seeks to boost crop yields. The country is using about 7 per cent of global arable land to feed about 20 per cent of the world’s population, according to Informa Economics, the US-based agribusiness consultancy.

The Chinese Academy of Sciences, a think-tank that advises the government, said in a recent report that China’s reliance on potash imports “may become a major threat to its fast developing national economy and long-term strategic needs”.

China imported about half of its potash last year, much of it from Canada and Russia. Domestic production is 3m-4m tonnes annually, with potash demand last year of 7.9m tonnes. Farmers have cut their use of potash due to the economic crisis, according to Wang Ling of China Fertilizer Market Week, but pre-crisis demand stood at about 11m tonnes annually.

Jon Galligan, a Hong Kong-based analyst at CLSA who studies Chinese agriculture, says that the shortage of potash contrasts with “sufficient domestic supply in nitrogen fertilisers and phosphate”, the two other main fertilisers.

“One of the stated goals of the government is to be self-sufficient in agricultural products, and by extension that also means being sufficient in fertilisers as well.”

China has the world’s sixth-largest reserves of potash and the country has been aggressively expanding domestic potash production, with output doubling between 2005 and 2009, according to statistics from China Chemical Reporter, an industry magazine.

But the domestic deposits are not large enough to match the country’s growing appetite for potash. Hence, China is working to develop resources in Laos, and earlier this year Chinese companies were reportedly eyeing a possible potash investment in Belarus.

The attraction of fertilisers for importers such as China, says Vincent Andrews, fertiliser analyst at Morgan Stanley in New York, is long-term supply security. “Countries are going to be perpetual buyers anyway, why not buy in bulk today and have [assured] supply?” he says.

This year’s mediocre harvests in the country and rising imports of corn underline how critical fertilisers will be if China is to maintain its goal of grain self-sufficiency. Fertiliser companies have already said they would redouble efforts to ensure fertiliser supply as the autumn harvest season approaches.

Bill Doyle, PotashCorp chief executive, acknowledged China’s growing influence on the industry in a recent conference call with investors and analysts. “Over the past 20 years, [China’s] annual potash consumption growth has averaged almost 10 per cent,” he said.

“The prospect of a hungry and growing market in China creates a very positive operating environment in the years ahead.”



The Financial Times