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Investors 'too afraid' over huge Saudi phosphate project

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Are phosphate investors getting too scared about Ma'aden?

The phosphate project, a joint venture between the Saudi Arabian Mining Company and Saudi Basic Industries Corporation, is certainly a big deal, costing some $6bn.

The tie-up, which announced on Monday it had started production of phosphates, will have capacity of 3m tonnes a year once it gets going in earnest next year.

That is equivalent to meeting some 7% of world consumption in one swoop, which would appear poor news for prices given demand which has, over the last 20 years, stayed pretty much static.

And it looks especially poor news for producers in Morocco, being situated closer to India, a huge buyer of the fertilizer, with imports of 8m tonnes last year.

"It is going to take a tremendous slice out of Morocco's marketing," Donald Sinclair, finance director at phosphate miner Sunkar Resources, said.

Capacity constraints

But Ma'aden alone is not the answer to the world's phosphate needs, for two reasons, he believes.

First, capacity is also being closed, typically for environmental reasons.

Mosaic, the world's biggest phosphate group, has had found its ambitions for the South Fort Meade mine in Florida constrained by concerns over wetlands.

And Mr Sinclair named an Indian group he believed would close down a mine this year over a lack of space to store gypsum - a byproduct of making the fertilizer, which might find a ready market too (it is better known as Plaster of Paris) were it not for the high levels of uranium in the phosphate industry's output.

'Frightened everyone off'

Secondly, phosphate demand is set to grow, as will that of other fertilizers, as the need to feed an expanding world population encourages farmers to maximise yields.

The flat world phosphate consumption over the past 20 years actually conceals an early-1990s dip - when the break-up of the Soviet Union prompted a steep downturn in the region's agriculture, which had been used to heavy state support- and a rebound thereafter.

And phosphate demand is expected to keep growing at about 2% a year, equivalent to more than 1m tonnes a year, and near-doubling consumption, to 80m tonnes a year, around 2040, according to UK-based consultants Cru Group.

"Ma'aden has frightened everyone else off from phosphate in the short term," Mr Sinclair told

"But taking growing demand into account, the addition of 3m tonnes of capacity at Ma'den gets swallowed up pretty quickly."

Pros and cons

Of course, Mr Sinclair would say that, as the finance director of a company looking to raise $880m to set up a phosphate fertilizer plant in Kazakhstan, where it is already mining the key raw material of phosphate rock from a Soviet-era mining concession.

The snag with the project, named Chilisai, is the relatively low concentration of phosphate in the rock at its deposit, which comes in at about half the 30-32% found in Morocco - meaning buyers need to transport twice as much to get the same level of fix.

The upside is the proximity of sulphur and ammonia supplies, key requirements for turning rock into fertilizer, and handy rail links into the former Soviet Union and China.

Indeed, it would be cheaper, in rail costs, to transport phosphate from Chilisai to north west China than from plants in the south of China, with the Caspian Sea offering shipping routes to Iran too.

'Not that risky'

The result, on Mr Sinclair's calculations, is a project offering $8.4bn of revenues over 20 years, with earnings before interest, tax, depreciation and amortisation of $171m in 2016, rising to $212m in 2025.

That washes out as an internal rate of return of 13.8%, after tax.

Is that a justifiable reward for investing in a country which, by reputation, is not one of the world's easiest places to do business?

"Kazakhstan is not that risky. Many people see it as a better bet than Russia," Mr Sinclair said.

Indeed, Transparency International rated Kazakhstan above Russia in Ukraine in its latest corruptions index, and on a par with Argentina, if below levels of major Western economies.

And Mr Sinclair, who was brought up on a sheep farm on a remote island in the UK's Outer Hebrides, might know a thing about wild and woolly places.


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