Take your seat at the meat feast in Asia

With a population of 1.3 billion discovering a taste for meat, satisfying China's growing hunger is a daunting task for its farmers. And it's getting harder. After years of overgrazing sheep and goats on ecologically fragile hills, Chinese farmers have helped turn the country into a giant dustbowl. Expanding deserts are swallowing almost a million acres of land a year. More than 4,000 villages have been wiped off the map. Soon 40% of the country could be scrubland, says China's Environmental Protection Agency, from the 18% that is desert today.

All of which is music to the ears of one group of companies potash producers. Potash is one of the three key minerals used in fertilisers for crop production. The Brazilians use it to boost their sugar cane crops in producing biofuels. The Americans use it to turn over huge corn harvests to feed their ethanol frenzy. Now, with huge swathes of farmland being eaten up, Chinese farmers have developed a heavy reliance on the fertiliser as a means to boost their yield. Fertiliser use in China is already running at three times the global average.

The problem for China is that unlike the other essential fertiliser nutrients, nitrogen and phosphate, which are derived from natural gas, deposits of potash are very limited. Mining deposits of potash are heavily concentrated in just three countries Canada (half the world's reserves), Russia (a quarter) and Belarus (9%). Control of those reserves is even further concentrated, with two cartels, the Canadian Canpotex syndicate and Belarussian Potash Company (BPC), accounting for more than 85% of global supply.

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The cartels are prepared to lord it over desperate customers. In a fierce stand-off last year, the BPC cut off supply to the Chinese market for seven months to secure higher prices. With inventories at Chinese potash distributors running desperately low, China eventually caved in, agreeing to a $30/tonne price lift to $330 per tonne. The BPC had a similar success in India this year, securing a $50/tonne increase, significantly higher than analysts had expected. "The BPC has become the muscular arm of the potash trade," says John Helmer in his Mineweb report.

The Belarus and Russian outfit has another key advantage over its North American rivals in supplying the key Asia markets. It might be $10 a tonne cheaper for Canpotex to ship its produce to China, but the BPC has a major cost advantage in crossing the Chinese border by rail. The BPC can also ship to India for $10 a tonne less than its rivals. Canpotex is present in both markets, and has been growing exports to India over the past three years, but the BPC looks to have a big advantage in supplying what Helmer calls the hungriest potash consumers.

The situation is strikingly similar to that of iron ore a year ago, says Goldman Sachs analyst Edlain Rodriquez. You have hungry Asian countries drawing on a supply that is concentrated in very few hands. Inventories are running very low and there are "prohibitive" barriers to entry. Iron ore has leapt 190% since 2003. Next year, potash looks set to follow the same path. With the global population increasing by 75 million a year, potash producers (see box below) should have a feast as they dine out on rising biofuel production and Asia's newfound appetite for meat.

The best bet in the potash sector

Of the companies that make up the BPC, Uralkali (LSE:URKA) looks the most attractive. According to analysts at Alfa Bank of Moscow, Uralkali is one of only two potash firms that can add significant capacity, in a cost-effective manner, accounting for 50% of planned global expansion. The company had a tough year in 2006, with exports falling during the Chinese impasse and a flood cutting mine production from 5.4m tonnes in 2005 to 4.2 million tonnes last year. But the company is well on the way to a strong recovery, says Troika analyst Mikhail Stiskin, with China back on line, and good prospects for further price lifts with the group's major partners. Uralkali currently sells one third of its output to China, with India taking 14%, and also has a solid footing in other southeast Asian markets (13% of sales).

Profits jumped 48% this year and the group has a production target of five million tonnes by the end of 2007. The company listed on the LSE last week; chief shareholder Dmitri Rybolovlev sold a 10% stake. Troika value the shares on a forward p/e of 15.8, a significant discount to its peers, with Stiskin expecting the share price to rise by 66%.