Not quite impending doom…
Maybe this is because, for all its grand talk, Brazil is finding its progress toward self-sufficiency to be slow indeed. In 2012, Brazil consumed a record 8.1 million tons of potash, 9.3% more than in previous years. With 90% of that coming from imports, powerful voices within Brazil are concerned about the security of their agricultural boom.
But potash remains the toughest element of fertilizer’s NPK triad. Vale’s Taquari mine is expected to close in 2016, owing to exhaustion of its reserves. Taquari produces around 10% of Brazil’s potash demand, so it will leave quite a void to be filled. Last week Vale also announced the suspension of its Rio Colorado venture in Argentina, which was supposed to turn Brazil’s neighbor into a top potash supplier.
Meanwhile, despite publicly pushing to increase production, Brazil’s government actually taxes domestic fertilizer production more heavily than imports. States charge sales tax on domestic fertilizers at 8.4% and levy a mining tariff of 2%, from which imports are exempt.
No wonder foreign suppliers seem to have concluded that Brazil is all bark and no bite. Potash Corp./Saskatchewan (USA) (NYSE:POT) noted in its Q1 2013 earnings report that the “Latin American market, particularly Brazil, started the year at a record pace and we have a strong order book well into the second quarter.” Agrium Inc. (USA) (NYSE:AGU) talks of leveraging “robust crop protection product demand growth in Brazil in 2013.”
Trouble may still lurk
Meet Verde Potash, a Brazilian fertilizer development company. Its Cerrado Verde project is a potash-rich deposit in the heart of Brazil’s largest agriculture market is quickly scalable, and connects to Brazil’s largest fertilizer distribution districts via existing and high-quality infrastructure. Vale is also looking at some potential new sites to fill the production gap from its Taquari mine.
And in what could turn out to be the biggest bombshell of all, Potassio do Brasil announced in April that it had discovered a large potassium deposit in the Brazilian Amazon. If the deposit is confirmed, Brazil could meet its own domestic demand within 10 years, according to the company.
Time will tell if this discovery is everything the company says. It certainly seems that near-term prospects for foreign suppliers remain strong. Still, investors should keep a close eye on Verde Potash and Potassio do Brasil, because they could prove to be game changers. And if the government ever gets serious enough to change its tariff structure, foreign suppliers may have to think twice about the risk they face in such a vital market.
The article Will Fertilizer Companies Lose Brazil’s Business Forever? originally appeared on Fool.com.
Sara Murphy has no position in any stocks mentioned. Follow her on Twitter @SMurphSmiles. The Motley Fool owns shares of CF Industries Holdings (NYSE:CF) and Companhia Vale Ads.
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