Russian city awaits potash boom but outlook fragile

At first sight, Berezniki looks a typically bland provincial Russian outpost with its decrepit housing blocks and factory chimneys, AFP reports. But the city in the Perm region of the Urals sits on a vast and hugely valuable secret -- one of the world's biggest deposits of potash, a mineral that is now coveted across the world as a fertiliser for food crops. Berezniki, 1,200 kilometres (750 miles) east of Moscow, sits on the Verkhnekamsk deposit, which was discovered in 1925 and which was developed after World War II. Its proven reserves represent some 34.5 percent of the world's total and the deposit is the second biggest in the world after those in Saskatchewan in Canada, according to the US Geological Survey. A veritable army of miners march up and down the kilometres of passages that have already been carved out 450 metres (1,500 feet) underground. Their machines work day and night to mine the pink coloured rock where the mineral is contained. This is then taken to the surface by conveyors to extract the precious mineral. Once turned into powder or crystalised as granules, potash is used as a fertiliser to help crops grow and increase their immunity to disease. The demand for potash is growing exponentially at a time when the world's population is exploding and the need for cereal crops among fast-growing emerging economies such as China growing sharply. But despite the boom, the outlook for the industry has become considerably more complicated in recent years. The main players in the potash industry need to be constantly aware of the need for a balanced strategy to satisfy demand while not resorting to over-production which could result in a serious price fall. The Russian potash giant Uralkali which owns five mines in the region and employs 11,800 people had to reduce its production at the end of 2012. The reason was poor weather conditions for agriculture and also macro-economic uncertainty which made farmers reduce their fertiliser purchases. There were also delays in the signature of contracts with China and India, two major emerging market clients but also tough negotiators. The prices of potash jumped after the food supply crisis of 2007-2008, prompting India and China to look for alternative fertilisers. As a result, potash prices slumped by 10 percent in 2012. However Uralkali has now launched the construction of a new mine called Ust-Yayvinsky just outside Berezniki. In a huge forest, works are underway to dig the new pits. This new site, which is expected to reach a depth of 520 metres, is planned to take over from another mine which is closing down. It is due to be commissioned in 2020 and reach full capacity in 2025. Uralkali, the largest potash company in the world by production and capacity, also has a license for another bloc called Polovodovsky, due to be commissioned in 2021. Meanwhile the existing Solikamsk mines outside Berezniki are being expanded and will reach their new full capacity by 2019. The construction of new mines should according to the group increase its capacity to 19 million tonnes by 2021 from 13 million tonnes currently, although this figure leaves some analysts sceptical. "The current tendency among many companies is to halt their projects," said Renaissance Capital analyst Boris Krasnozhenov. But Uralkali however remains confident. "Right up until 2018 the market is going to be very good," Uralkali chief executive Vladislav Baumgertner told reporters. But he added: "It is going to be very difficult to predict what will happen afterwards," adding that its new projects will only be launched in 2021 if there is a "satisfying" correspondence between supply and demand. A big factor will be if the Anglo-Australian mining giant BHP Billiton launches its Jansen mine project in Saskatchewan, a major project which is currently in the balance. If realised, the Jansen project would increase supply and in turn amplify the market's bullish tendencies. Its fate is being watched closely by all market players. According to Uralkali, the potash market is now recovering after a slump in the fourth quarter of 2012 due in part to the fact that the contracts with China and India have finally been settled. Global potash sales are expected to climb 5-7 percent in 2013 compared to the year earlier, with India, China and North America expected to be the main drivers, it said.