So now it is potash good, oil and gas bad for BHP – which, given the way the company is changing its focus towards commodities with a strong low carbon, renewable skew, is understandable.
The driver seems to be growth – BHP sees oil and gas declining with demand easing over time simply because it is a major source of global warming emissions (along with the likes of coal burning in power stations and steel mills and sintering/coking plants).
More importantly, with the rise of activist shareholders and governments on climate policy, BHP has concluded that holding oil and gas directly on its balance sheet is too big a risk looking to the future.
BHP and much of the world accepts that steelmaking will be essential for decades to come, even if China arcs up, as it is doing at the moment driving iron ore prices lower in the biggest sell off seen for years.
What is not sustainable is the use of thermal coal to produce power – even if prices currently top $US150 to $US170 a tonne for high quality steaming coal from Australia. BHP has written down the value of those remaining thermal coal mines to the point where they are liabilities on the books and bHP will have to pay buyers to take them off its hands.
Nickel, copper and some other metals are long term, renewable essentials, hence the move by BHP to dig deeper in these product sectors.
Its cheap $351 million takeover offer for small Canadian group Noront Resources will, if successful, give the company access to some of the most highly prospective copper nickel and PGE deposits, starting with the Eagles Nest prospect in the ring of fire area of Northern Ontario.
This prospect and others plus Jansen potash will turn BHP into a major investor in Canada with access to the world’s biggest markers for renewables such as EVs and food – despite China’s size.
Investors really should be looking at potash as a commodity like nickel and copper – it will be an essential to the plant-based food future now emerging around the world.
Plant-based food is a renewable product in that carbon emissions are smaller than the methane belching livestock business. Both will coexist.
Potash is a key element in plant nutrition that also makes crops more drought resistant.
And after years in the doldrums because of overproduction, BHP sees signs of an improvement.
In its 2021-22 outlook for its key commodities issued on Tuesday, BHP said:
“Potash prices have increased sharply over the last 12 months, despite ongoing excess production capacity.
“Strong demand due to favourable farm economics and constrained supply from presently operating assets have combined to inspire the rally.
“EU sanctions on certain grades of Belarussian potash exports have amplified the existing upswing.”
In a quarterly survey in June, the World Bank said: “Although there is ample capacity to respond to strong demand, it may take some time to ramp up output, which could provide continued short-term price support.
“Countervailing duties imposed by the United States on phosphates imports from Morocco and Russia have disrupted trade flows. Furthermore, there are indications that similar trade actions could be applied to alleged unfair subsidies for urea and ammonium nitrate.
“Geopolitical tensions in Belarus and Russia could lift potash prices, but stringent environmental policies in China may slow potash imports.
That comment contains a big hint about Jansen – its proximity to the huge US market from Canada and the ease of supply (down into Mexico as well)
BHP tried to get big in potash more than a decade ago with its aborted takeover offer for Potash Corporation of Canada. That was a very expensive attempt had it succeeded – $US38.6 billion in 2010 dollars.
The Canadian government said no and whatever Jansen costs, BHP initial investment at around $US10 to $US12 billion will be considerably less than that attempt, and produce a far better return.
The deal would have given BHP global scale – Potash Corporation had 25% of the world market for the fertiliser at the time.
Potash Corporation of Canada is no more – in early 2018 it merged with another local producer called Agrium to become Nutrien which is the global Number one and the main rival to BHP’s ambitions.
Jansen is slated to produce 4.35 million tonnes of potash per year from 2027. That will boost Canadian output by around 18% to 20% a year.
Canada produced 21 million tonnes in 2019, accounting for more than 31% of global supply in the same year of 66.2 million tonnes.
Another big competitor is the US producer, Mosaic which has signifiant operations in Saskatchewan where Jansen is to be located. Nutrien dominates the province.
“It will take another decade for Jansen to have significant production,” Ken Seitz, chief executive of Nutrien Potash said in a statement on Tuesday.
Nutrien expects global demand to grow by 2-3% per year until close to 2030.
The company is also seen as an ideal partner to dilute BHP’s risk and development costs. BHP has said it is open to but not in need of a partner, while Nutrien has said that any tie-up with BHP is not its focus.
Global potash demand by 2030 is likely to be more than sufficient to absorb additional supply from Jansen, said Canadian analysts say, as farmers in Asia use more of the crop nutrient.
BHP took a $1.3 billion charge for existing infrastructure spending on its potash asset, which analysts said could make it more attractive to any potential partner.
“Giving the go-ahead to Jansen is not enough, they should do much more,” said a top 20 investor told Bloomberg. “They should create a partnership with Nutrien Ltd and even take it over.”
That was the plot in 2010 at an astronomical price that would frighten investment markets even now, including the unnamed investor.
Investors should be careful that the attention on Jansen and potash doesn’t distract from keeping a close eye on iron ore prices which are sinking slowly as China attempts to force steel producers to cut output to reduce carbon emissions.
China is pressuring steel companies to use more expensive, lower grade iron ore from China and non-Australian exporters, as well as lower quality coking coal (which is more polluting).
Unfortunately for the Communist Party, their actions in steel, plus the continuing attacks on the country’s highly successful tech giants and their wealthy founders (ignoring the billionaires among the senior ranks of the party, including President Xi’s family) is helping push a weakening economy lower.
The upsurge in Covid Delta cases in carrying parts of China is not helping confidence or the economy (or exports with at least one major port disrupted).
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In its commodity outlook, BHP said it sees Chinese steel production rising 5% even though the government has made it clear it wants the industry to keep output to 2020’s levels of around 1.065 billion tonnes.
“Global crude steel production was unbalanced in the 2020 calendar year, with strong growth in China offset by a steep fall in the rest of the world.
“In the 2021 calendar year to date, this has corrected to some degree, with utilisation rates in the ROW [rest-of-world] back close to normal, on average, even as China continues to produce at very high run-rates.
“Notwithstanding regulatory uncertainty with respect to periodic output controls, and Covid-19 risks, Chinese steel production is expected to increase by around 5% in the 2021 calendar year.
“We anticipate a continuation of strong end-use demand conditions in China and ongoing recovery in the rest of world over the course of the 2022 financial year.”
On iron ore:
“Iron-ore prices have been elevated since the Brumadinho tailings dam tragedy in Brazil first disrupted the market in early 2019. Conditions have been particularly tight since the second half of the 2020 calendar year, with new record highs for the 62% Fe index fines and the lump premium established.
“Forces contributing to price gains over the most recent half have been strong Chinese pig iron production, recovering pig iron production and tight supply of branded fines products. The premium for lump product has been very favourable in the most recent half, buoyed by similar factors to fines, in addition to sintering restrictions in parts of China.
“Medium term, China’s demand for iron ore is expected to be lower than it is today as crude steel production plateaus and the scrap-to-steel ratio rises.”
The collapse in iron ore prices since the end of June – 37% for 62% Fe fines from the Pilbara – tells us the slide in prices might have started before BHP realised.
