Energy & Resources

Fertile times

Why mining firm Zhongchuan’s hitting headlines

Fertile times

Potash: growing demand

A month or two ago, before BHP’s bid for the Potash Corporation of Saskatchewan, how many of us even knew what potash was? Now headline writers are depicting it as the new frontline in the struggle for resources between China Inc and the global multinationals.

From relative obscurity to top-billing; something similar applies to Zhongchuan International Mining. A Chinese minnow with no overseas track record to speak of, Zhongchuan may now hold a valuable card in potash politics, and one that could turn out to be an ace if the industry shake-up goes ahead.

That’s because Zhongchuan also owns a major potash deposit in Canada. It has lacked the funds to get the mine up and running. But its chances of finding them have improved substantially since news of BHP’s bid broke last month.

Potash ores are an important source of potassium, one of the three nutrients essential for plant life (the others are nitrogen and phosphorous). Deposits like Zhongchuan’s resource were formed by the evaporation of ancient inland seas and are used by farmers as fertilisers. China does have its own potash reserves. But they are generally lower grade deposits in remote locations, which require major investment to tap.

Demand for potash looks resilient. Chinese farmers are also some of the heaviest users of chemical fertilisers, requiring at least a fifth of global potassium production (much of which is imported).

The possibility of the BHP takeover going through also has Chinese policymakers worried that potash prices will move in the same direction as iron ore ­– upwards. Rumour has it that state-owned Sinochem Group is mulling a ‘white-knight’ counter-bid for the Canadian giant (see WiC76).

All the recent excitement makes Sun Ximing, Zhongchuan’s chairman, look like a master strategist. Four years ago he had a fateful conversation with Wang Min, the vice minister of land and resources. Caixin magazine reports that Sun asked: “What mineral should I invest in?” Wang’s reply: iron ore and potassium were what China needed most.

Sun did his homework and discovered that half the world’s potash reserves were in Saskatchewan. So in 2007 he set about buying the exploration rights to what he thought was a promising field, a small parcel of land called KP488.

Two years and Rmb200 million ($29 million) later, the deposit was announced to contain as much as 893 million tonnes of potash. That is a significant find: close to China’s entire domestic reserves (estimated at 1 billion tonnes).

The bad news? Mining the resource will need another $2 billion in investment. And if the site lies idle too long, the mining rights revert to the Saskatchewan government.

Some question too if the find is smaller than Zhongchuan hopes. Qi Wen, a professor at the Chinese Academy of Geological Sciences, argues that something like 500 million tonnes is more likely.

None of that is likely to stop the project from moving forward. “We have been suggesting Zhongchuan acquire the exploration rights to the surrounding vicinity and expand its mining area,” Qi told the Century Weekly magazine. Qi is not the only academic pushing for expansion. In July last year Zhongchuan’s Sun got five professors to write to Premier Wen Jiabao asking for support for potash exploration in Canada. “Potash fertiliser supply in China has been monopolised by suppliers from Canada and Russia, explains Zheng Mianping, another of the letter-writers. “Even during the financial crisis, potash fertiliser producers would rather limit production than slash their prices.”

The appeal won Zhongchuan a Rmb80 million government grant, most of which has gone into feasability studies. But the BHP announcement has upped the ante, and the company now finds itself with various suitors, including Chinese sovereign wealth fund CIC. Talks began in 2008 but now have added urgency – Sun told Caixin that CIC had called to increase their offer. Discussions have also started with state-controlled CNOOC and ChemChina. Perhaps a thank you call to BHP boss Marius Kloppers might soon be in order too.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.