The most vital resource of the next decade

Potash is one of the key nutrients for plant growth. There is no known subsitute, it can be found in only a few places worldwide, and demand for it is rising every year. Tom Bulford looks at the case for investing in this esesntial fertiliser.

If you don't want your neighbour to barge in through your front door, don't tell him there is a party going on.

That is a message that does not seem to have occurred to the bosses of Canada's Potash Corporation which, having trumpeted the virtues of the potash business, now finds itself under siege from the Australian natural resources giant BHP.

BHP's bid has thrown the spotlight on one of the world's most attractive commodities. Potash may not have the glitter of gold or the ubiquity of oil, but it is arguably more important than any other of the earth's raw materials. Without it the world may not be able to feed itself today, and would certainly struggle to cope with the relentless increase of the global population.

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The trouble is that there are very few places on the planet where you can find the stuff.

Without this scarce mineral, we'd go hungry

Here are a few facts about this unheralded commodity, the correct name of which is potassium chloride.

It is found underground in conjunction with salt and can be mined through conventional means of extraction, or else by solution mining, where water is injected underground to dissolve the potash. It is then piped to the surface and the water content is allowed to evaporate.

Two-thirds of annual production and about 80% of known global reserves are accounted for by just twelve countries, led by Canada, Russia and Belarus. Canada's Potash Corporation, which mines potash from the Williston Basin in Saskatchewan, is the largest producer, accounting for 17% of global output.

But while potash can be found in only a few places, it is used worldwide. Along with nitrogen and phosphorous it is one of three key nutrients for plant growth. Of the three, potash is the one in which most soils are deficient within the key markets of China, India, the rest of Asia and Latin America. Since there is no known substitute for potash, demand is rising year after year.

Potash means better soil, better soil means more food and more food means that more mouths can be fed. But the demand side of the equation is a little more complicated than this.

Why the world's swelling crowds are baying for potash

The global population increases by 75 million people every year. But on top of this there is a trend towards urbanisation and a demand for a better diet.

In China especially there has been a migration away from rural areas and into the city, and today urban incomes are three times those of the country. These city dwellers not only have more money, but obviously are not in a position to cultivate their own food. They need to buy it, and they want to spend some of their extra income on a finer diet.

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That means more fruit, vegetables and meat. Consumption of these foods, commonplace to you and I but luxuries in many parts of the world, has quadrupled in the last 25 years.

With its benign climate, California produces about half of all the vegetables eaten in the USA. But every two years, China adds this much output to its own production. Fruit and vegetables, and especially the humble banana, need plenty of potash. Grain also needs potash and livestock needs grain.

In China, Africa and other developing nations there is an appetite for beef (if for no other reason, beef makes a change from the old staples of poultry and pork.) But while it takes two kilogrammes of grain to produce one kilogramme of poultry meat and four of grain to produce one of pork, it takes seven kilogrammes of grain to produce one kilogramme of beef.

To meet these evolving tastes, the need for potash is about to explode.

Hunger for potash will double in ten years

The Fertecon consultancy estimates that potash use will need to double from 50 million tonnes per annum to 100 million tonnes per annum in the next ten years to meet growing food demand. This fact has been latched onto by investors in the commodity boom. Having traded below $100 per tonne for years (partly the consequence of the collapse of the Soviet agricultural system) the price rocketed to $700 per tonne in 2008 before slipping back to today's $325.

In its efforts to fend off BHP, Potash Corporation is claiming that the supply/demand balance is about to turn in favour of suppliers and that the price will soon be heading back up again. 'Supply is characterised by substantial barriers to entry' it claims. 'The potash market is approaching an inflection point.'

No wonder BHP has made its move. And no wonder investors are scrambling to find other ways to play this powerful theme. One penny share in particular has mind-boggling potential.

This is a company that has been quietly buying up this basic necessity for years almost totally unnoticed by the City. And it was the lead recommendation in the September issue of Red Hot Penny Shares.

This article is taken from Tom Bulford's free twice-weekly email The Penny Sleuth

Red Hot Penny Shares is a regulated product issued by MoneyWeek Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be riskier than other investments they can be relatively hard to trade and if you need to sell soon after you've bought you might get less back than you paid. Please seek independent financial advice if necessary. 0207 633 3780.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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