A key overview of potash industry opportunities (Part 6 of 8)
Capital and time prerequisites
The high capital cost and lengthy development time are important features of the potash industry. While fertilizer plants typically take years and cost billions to construct, developing potash mines are the costliest of mines among all types of fertilizers.
Higher capital requirements
According to Potash Corp. (POT), it takes about $1.8 to $2.0 billion to make an ammonia or urea plant with capacity of 1 million metric tonnes of ammonia a year. The time to develop this plant requires a minimum of three years. Phosphate plants require slightly higher, at $2.1 billion to 2.3 billion per 1 million metric tonnes of phosphate, which requires about three to four years to develop.
Capital requirements jump to between $4.7 billion and $6.3 billion Canadian dollars for a 2-million-metric-tonne greenfield mine in Saskatchewan. This is equivalent to roughly $4.5 billion to $6 billion U.S. dollars, using the exchange rate on December 9, 2013, and it includes costs like rail, utility systems, port facilities and, if applicable, cost of deposits. It can take approximately seven years from the start of development to full operational capacity.
Note that potash figures are based on 2 million metric tonnes of potassium chloride production capacity. So the actual length of time required is likely less than seven years and the capital requirement would be less on a 1 million metric tonne production basis.
Brownfield projects are cheaper
Compared to greenfield projects, brownfield projects take much less time and capital, according to Potash Corp., since much of the existing infrastructure, such as rail, utility systems, and port facilities, are already in place. Because of the relative cheapness and the high capital requirements to develop potash mines, existing players like POT, AGU, and MOS have a distinct advantage against new entrants.
When profitability is rising, incumbent firms will be first to expand production and capacity due to their comparatively lower costs. Once production comes online, higher supply will push prices lower, deterring new players from entering the industry or driving development projects to a hold. In this way, the potash industry is like a turtle, able to shield itself from outside threats.
Browse this series on Market Realist:
- Part 1 - Potash industry opportunity for companies POT, AGU, MOS, and IPI
- Part 2 - Why are economical potash deposits concentrated in 3 locations?
- Part 3 - Because potash is a global market, investors must think globally
- capital requirements