Digging Deeper

After three decades in the potash industry, Norm Beug has grown accustomed to fluctuations in demand and price for his product, but he’s never experienced anything like the turbulence that shook the business after the meltdown in the financial services industry and the recession that began in the fall of 2008.

Beug is Senior Vice-president, Potash Operations, with the Mosaic Company, a Minnesota-based organization that operates three large potash mines in Saskatchewan and two smaller ones in the U.S.

All told, those facilities are capable of yielding 10.4 million tonnes annually; making Mosaic the third largest producer in the world. Last year, however, was a different story when they turned out only 5.9 million tonnes.

“It was one tough year alright, the worst in my experience,” says Beug, who grew up on a farm a few miles north of Regina and now runs Mosaic’s potash operations from an office in the Saskatchewan capital.

“But it’s coming back. We see demand for fertilizer rebounding. Farmers are stepping up around the world and starting to buy again. Fundamentally, if they don’t put fertilizer on the ground, yields go down and they pay a price.”

Others are equally bullish about the recovery. “The rebound in potash demand appears to be happening a little more quickly than we had originally anticipated,” RBC Capital Markets analyst Fai Lee wrote in mid-March. “We have revised our outlook for Mosaic’s potash sales volumes accordingly. We continue to expect prices to improve over time due to stronger demand.”

“U.S. farmers had record soybean and corn yields last year, but did not apply much fertilizer and have mined the nutrients out of the soil,” Patricia Mohr, Bank of Nova Scotia economist and commodity market specialist, noted in a recent interview. “A reasonable crop in 2010 will require increased fertilizer application.”

If there is a cloud on the horizon, it is China, observes CIBC World Markets analyst Jacob Bout. “China has been the swing factor in the potash industry over the past five years, driving global demand and resulting in a surge in pricing in 2007 and 2008,” Bout wrote in a recent report. “While we are seeing a pickup in demand in spot markets and in India, the outlook for China remains less optimistic.”

Prior to the crash in 2008, Beug says potash got swept up in the same speculative bubble that drove the prices of real estate, other commodities and many goods and services to unrealistic heights. “Commodity markets ran up, the price of grain went up and the forecasts were sky high,” he says. “Fertilizer pricing followed that. When it all collapsed it created tremendous uncertainty all over the world.”

Global demand for fertilizer plummeted from 52 million tonnes in 2008 to 29 million tonnes last year, according to CIBC’s Bout, and potash production fell with it.

Mosaic, which employs about 2,600 people at its five mines and 1,500 of them in Saskatchewan, was forced to lay off some of its staff and contract workers in March, 2009. The employees were called back within weeks, says Beug, because the company decided to proceed with long-planned maintenance and expansion projects at its mines.

“We were fortunate,” he adds. “We watched our pennies during the good times and were able to fund our growth during the downturn.”

The company’s K1 and K2 mine complex at Esterhazy, 180 km east Regina, has been operating since 1961. It is the biggest potash producer in the world with a capacity of 5.3 million tonnes annually. The Belle Plaine mine, 40 km west of the provincial capital, opened in 1964 and has a yearly capacity of 2.8 million tonnes. The Colonsay facility, 60 km southeast of Saskatoon, has been in production since the late 1960s and can turn out 1.8 million tonnes a year. The company also operates a mine at Calrsbad, New Mexico, (annual capacity: 1.7 million tonnes) and another at Hersey, Michigan (100,000 tonnes).

The Esterhazy and Colonsay mines are both underground operations with reserves located about 3,500 feet below the surface.

At Esterhazy, two shafts transport miners and minerals up and down and, at last count, there were some 6,000 km of tunnel. Beug notes that the mine has a footprint measuring about 30 km by 15 and workers can spend 20 to 30 minutes travelling from the bottom of a shaft to the mine face–which is one reason why K1 and K2 now operate two, 12-hour shifts daily.

Mosaic opened new areas to be mined at Esterhazy last year and installed new drying and screening circuits as well as crushing and flotation equipment.

The reserves at Belle Plaine are located about 1.5 km below the surface, which is too deep for underground potash mining. Excess heat would be one problem associated with sending men down that far. As well, the company would have to leave too much potash in place to reduce the risk of tunnels and caverns collapsing.

To overcome this, Mosaic uses a technique known as solution mining to extract the potash. Caverns are drilled from the surface, water is pumped in to dissolve the potash and then the potash solution is drawn back to the surface.

The company draws its water from Buffalo Pound Lake and consumes about three to four per cent of the water that flows into the lake annually, Beug says.

Close to 40 per cent of the company’s potash production is sold in North America with the balance going to customers around the world. Mosaic operates port terminals, warehouses and blending and bagging facilities in nine countries and sells its products in over 30 countries.

Investments in plant and equipment are critical to the continued success of the potash mines. “It’s a competitive business,” says Beug. “You have to stay cost effective. You have to keep working on your technology. Your costs go up as your footprint gets bigger. You’re moving ore from a long way out.”

As well, potash mines tend to have long lives. Some in Europe have been operating for 100 years. Mosaic’s Carlsbad mine has been in business for 65 years. The company is sitting on a century’s worth of reserves at some of its Saskatchewan properties and there’s no question that there will be demand for the product.

For one thing, the world’s population is increasing at a rate of about 1.1 per cent annually, or 73 million people per year. Second, rising income levels in China, India and other developing countries bring changes in diet. People eat more meat and dairy products and that means grain production must increase to feed more animals.

According to a report prepared by CIBC World Markets, global grain demand is growing at about two per cent a year while the acres under cultivation are either flat or shrinking.

The use of fertilizers accounts for 40 to 60 per cent of the increased yields required to meet rising demand.

“If you look at food consumption and population growth, they’re both up year over year and those are the fundamentals that drive our business,” says Beug. “That’s why we’re moving aggressively on our growth plans despite the downturn that occurred last year. The fundamentals say we need to grow our production in order to match demand.” CMJ

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