As the world’s biggest importer of potash, India is being approached by foreign governments and companies seeking investment in their projects. India should be wary about putting money into such projects, as they may make more strategic than business sense, analysts said.
In the second week of October, Russia’s Acron Group approached the Indian fertilizer industry, via the government, to invest in a new $5 billion potash mining project that the conglomerate is developing.
In the following week, Belarus approached India, seeking its interest in a stake in an upcoming potash mine that’s on the block. A fertilizer ministry official with direct knowledge of the matter said Belarus was seeking to sell a 25% stake in the asset valued at about $1 billion.
These are the latest in a series of proposals from at least three countries—Canada, Russia and Belarus—that have approached India in the last year and a half, seeking equity investments from either the government or companies in new mining projects.
At about 5 million tonnes (mt), India is the single largest potash importer and controls nearly half the total world potash export market of 10 mt. Only 5% of the country’s potash consumption is met domestically, thus making the country almost entirely import-dependent for the mineral.
Canadian companies that have come calling include Encanto Potash Corp., Potash One Inc. and Athabasca Potash Inc. Indian officials say that apart from the Canadians and the Russians, Belarus-based JSC Belarusian Potash Co. and Germany-based K+S KALI GmbH have also approached India for a possible stake purchase in this period.
“Typically, these companies need to raise funds for projects that are still under development. So they are happy to offer equity,” said a government official.
Potash, which is generally produced at $320-325 per tonne, sells in the international market for about $500 per tonne. Retail prices are likely to reach Rs 10,000 per tonne by January from the current Rs 7,000-8,000 per tonne, said Tarun Surana, an analyst with Mumbai-based Sunidhi Securities and Finance Ltd.
“In April, the retail price was Rs 4,455 per tonne,” he said. “It could more than double by April next year.”
Government and industry officials say that while investing in a potash firm makes strategic sense for the country, high-volume investments and long gestation periods make such investments economically unviable.
“We cannot put billions of dollars into such projects for long periods of time for which there will be no economic return for a long time,” said U.S. Awasthi, managing director, Indian Farmers Fertilizer Co-operative Ltd (Iffco).
A finance director with a government-owned fertilizer company agrees and says that in addition to this is the problem of improper due diligence.
“Valuation is a function of due diligence. In many such cases, we are simply unable to properly assess the available mineral capacity in mining assets in foreign countries, so it is not possible to value them accurately,” said this person, who declined to be identified.
A second government official said that apart from these issues, the fact that the government has not put in place a dedicated investment policy for foreign buys hinders such investment.
“Moreover, if an equity stake does not guarantee an assured offtake agreement commensurate with the stake buy, it makes no strategic sense for any company to invest so much money,” said this official.
No company will invest unless the government devises a mechanism to absorb price fluctuations in the international potash market, he said.
“By virtue of the fact that urea prices are controlled, all such fluctuations are absorbed by the government,” he said. In the case of potash, since the selling price is now freed, companies take the hit if prices go down.”
Prices of all non-urea prices were deregulated in April 2010.
To be sure, as far back as February 2009, the fertilizer ministry had mooted the idea to devise a comprehensive policy to acquire fertilizer assets abroad. The official cited above said that while a cabinet note on this was moved in 2009 itself, it was never implemented.
On 20 August, Mint first reported that the government had constituted a committee of secretaries to look into strategic acquisitions in mining assets abroad.