Cultivating the market: Higher prices and exports have boosted the potash industry

At a time of growing global demand for fertiliser, the potash industry in Jordan is becoming increasingly profitable. An ingredient in a number of fertilisers, potash is extracted from the Dead Sea. Most of the product is then exported to a growing Eastern market, including to India, South-east Asia and China. The industry comprises the Arab Potash Company (APC), which was partially privatised in 2003 and has an exclusive concession from the government until 2058.

PERFORMANCE: APC’s performance in 2011 continues the positive trend already visible in 2010. With global demand for potash recovering steadily since 2009, net profits rose 23% from JD131.8m ($185.2m) in 2009 to JD162.7m ($228.6m) in 2010; now they have jumped a further 84% year-on-year to JD299m ($420.3m) in 2011, according to a company statement released in February 2012. This is good news, not only for the company and its shareholders, but also for the Jordanian government, which has harvested almost JD135m ($189.7m) in revenues from the year’s work, up 25% on the JD106m ($149m) received in 2010.

In an interview with OBG, APC’s chairman, Nabih Salameh, indicated that there is a basic and growing need for potash worldwide, driven by population growth, rapid economic development in emerging markets, and increasing standards of living. In 2011 a growing demand for agricultural produce put pressure on grain supplies, thereby increasing grain prices and profits for farmers, who were in turn able to spend more on fertilisers. Consequently, demand for potash grew by an average of 3% worldwide, allowing APC to increase its sales in key markets: India, South-east Asia and China.

Potash prices are now drawing closer to the levels reached prior to the global economic downturn in 2009. In 2008, prices were around $600 per tonne, according to APC. While prices have decreased to around $500 per tonne, this is still a major increase from $100 per tonne, the going rate in 2002.

Despite the positive trend in recent years, the potential for market volatility was proven in 2009, when reduced fertiliser imports by the likes of China and India – which together make up some 25% of global fertiliser demand – caused potash prices to retreat from the record-high levels of 2008 to the middle of the $300-400 range. But even that year brought APC JD131.8m ($185.2m) in net profits, as potash makes up only a small part of total fertiliser production.

CHALLENGES: There may still be bumps on the road ahead: a report published in January 2012 by research firm DBRS Limited suggested that the potash industry may see swings in profitability over the coming years, caused by new market entrants and increased potash production. With domestic demand having soaked up only 8% of APC’s potash sales in 2010 and the remaining 92% having been exported abroad, it is clear that such volatility in world markets could affect APC.

Furthermore, as difficulties in the eurozone in late 2011 renewed concern over prospects for the global economy in 2012, crop prices could become volatile and fertiliser producers may be reluctant to commit to large potash purchases. Yet the fundamental supply-demand outlook for 2012 remains promising, says the 2011 annual report of Canadian Potash Corporation: worldwide grain inventories are already at lower-than-average levels, and there is a strong demand for the high yields which fertiliser inputs produce.

EXPANSION PLANS: In 2011 APC began operating with an expanded production capacity of a potential 2.45m tonnes per year, up by 22.5% from the former 2m tonnes per year. This is the culmination of a project which has been around five years in the making and received $600m in investment from APC. With a substantial input from ABB – the Swiss international engineering firm – the project included the modification of solar ponds, the construction of a warehouse at Safi, the expansion of an existing warehouse at Aqaba, and the building of a new cold crystallisation plant.

Despite the expansion, the potential of APC’s new facilities is yet to be fully realised. According to Salameh, the company has not yet achieved more than 2.2m tonnes in actual production. The factory is still in the commissioning phase, and production capacity will increase gradually. Yet provided that global demand holds steady, it seems likely that the company’s performance in 2012 will outdo that of 2011.

Expansion is time-consuming and costly, and APC is unlikely to contemplate such projects in the near future. The company is likely to instead focus on increasing the efficiency of the production, evaporation and processing of potash. Investments to this end are currently undergoing technical feasibility studies.

Among such plans is a project that aims to expand production at the Hot Leach Plant (HLP) from 1.4m to 1.7m tonnes per year; studies commenced on the project in 2011 and engineering works are expected to begin in 2012. A new de-dusting system has been determined for the HLP and is expected to be complete by 2013, while updated production control systems are due to be installed at the cold crystallisation plant (CCP1) and the HLP in early 2012 and 2013, respectively.

EXPORTS: As production capacity has expanded, so have APC’s export agreements, particularly in the rapidly growing markets of India, China and South-east Asia. India is the largest buyer of APC’s potash, accounting for 40% of sales in 2010. “APC’s competitiveness in the country is reduced slightly by the fact that the Indian government subsidises local fertiliser producers,” Salameh told OBG. Nonetheless, the Indian market is one with which APC is becoming increasingly involved.

In 2010 APC made a three-year agreement to supply India’s Zuairi Industries with around 1.2m tonnes; however, only 200,000 has officially been promised so far, in a $100m contract signed in August 2011. Having obtained its biggest contract to date in 2010 – to supply Indian Potash Limited (IPL) with 600,000 tonnes – it sealed the deal for the supply of a further 200,000 tonnes to IPL in August 2011.

Indonesia and Malaysia together make the second-largest contribution to APC’s sales – a combined 16% in 2010 – and they too are increasing their trade with Jordan. In November 2011 the APC signed a memorandum of understanding with Indonesia’s Petrokimia Gresik (PKG) to supply it with 150,000 tonnes of potash annually from 2012 to 2014. China, which was APC’s third-largest buyer in 2010 (accounting for 15% of sales), is also boosting potash imports from Jordan. Last year APC signed a $145m deal with a large Chinese fertiliser importer, Sinofert Holdings, to supply the Chinese market with 300,000 tonnes of potash.

During a visit by the Chinese ambassador to APC’s factories at Safi in June 2011, he said that China is keen to increase trade exchange with Jordan – which already stood at $2bn in 2010 – and placed a special emphasis on encouraging Chinese businessmen to import what he described as Jordan’s high-quality potash. All this comes on the back of a sizeable long-term supply agreement signed with China in 2010 for the next three years and stipulates the supply of 1.8m tonnes by APC.

REGIONAL SALES: While Asian and South-east Asian markets absorb most of APC’s potash, markets closer to home are also significant: 14% of the company’s sales in 2010 were made in deals with Jordan, Europe and Africa. Political uncertainties in Egypt reduced demand in the sulphate-of-potash (SOP) and oil-drilling sectors in the first quarter of 2011 only, with consumption resuming at normal levels for the rest of the year. As for 2012, regional demand may be boosted slightly by the emergence of several small SOP plants in Saudi Arabia and elsewhere. In Africa, the company is studying the possibility of setting up its own distribution centres to make fertiliser available at all times.

OWNERSHIP CONCERNS: News of APC’s strong performance in 2011 comes as some Jordanians are expressing concern over the government’s decision to sell a stake of the company to the Canada-based PotashCorp (PCS) in 2003. PCS currently holds the largest stake in the company (a 27.96% share, compared to the Jordanian government’s 26.88% and the Social Security Corporation’s 5.04%).

With pressure from MPs mounting on the government in 2011, former Prime Minister Awn Khasawneh reiterated in March 2012 that the government would review the privatisation of formerly state-owned companies, including APC and the Jordan Phosphates Mines Company (JPMC). But he has also stressed that the privatisations are sanctioned by Jordanian law, guaranteeing the rights of foreign investors, and emphasised that privatisation does not by itself equate to corruption, as some MPs had claimed.

Public hostility is driven in large part by the belief that privatisation is benefitting foreign investors more than Jordanians. Yet APC maintains that it makes a strong contribution to the local economy: its transfers to the state reached nearly $190m in 2011, while it provides direct employment to 2360 Jordanians as well as to a further 600 through subsidiaries and affiliates, and makes maximum use of local resources. Under its Social Responsibility Programme, APC contributes to local schools and health centres, maintains a mosque which the company established, and supports several local non-governmental organisations and institutions.

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The Report: Jordan 2012

Industry and Retail chapter from The Report: Jordan 2012