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The “China and India will eat the world” theory came unstuckqrcode

Jan. 5, 2013

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Jan. 5, 2013
Back in 2010, global mining giant BHP Billiton was aching to buy Canadian fertilizer producer Potash Corp. And the Chinese government was apparently fretting about the rise of potash prices after the deal, which ultimately failed.
That all fitted neatly into what Asia watchers call the “China and India will eat the world” theory. This widespread view, a favorite of commodities bulls, holds that demand can only ever go up because China’s and India’s huge populations are getting richer and consuming more things. Commodities investor Jim Rogers is a key proponent of this.
But fast forward to today and BHP Billiton, which launched a gigantic project to produce the potassium-salt-based fertilizer by itself after its failed bid for Potash Corp, may now put the project on hold according to the Wall Street Journal. The reason: falling demand. The price of potash has slumped in the last quarter after rising rapidly throughout 2007-2009. Mosaic, a Canadian producer, has just issued results showing a 16% revenue drop in the last quarter on the same time last year.
Potash’s problem is that while Chinese food consumption has definitely increased over the last two decades and Indians are eating more meat, their farmers remain less interested in using good quality fertilizer than their Western counterparts. Potash is touted as a superior soil booster. But there are cheaper alternatives, such as urea, that Indian farmers turned to when potash prices were skyrocketing. As well as exploring alternative fertilizers, China has long worked on growing its own potash industry, which could increase global supplies and hurt international potash firms.
Potash companies argue farmers cannot ignore them forever because their fertilizer is best to sustain high crop yields. That could well be true. But Indian farmers tend to be extremely poor and their Chinese counterparts are not too wealthy either. They are bound to look for bargain alternatives to potash where they can. Successive food scandals and snafus in China, from poisoned milk to exploding watermelons, provide ongoing evidence of farmers choosing price over quality.
China is also cutting back on potash strategically. Earlier this year it delayed new purchases to strengthen its negotiating position with suppliers; it eventually won a huge discount from Canadian producers. More efforts by China to use less of the fertilizer or produce its own can’t be good for global suppliers.
So, next time you see a resources company boss give a presentation full of lip service to growing demand from China and India, think twice. It might be rash to invest in a commodity on the grounds these two nations will relentlessly gobble it up.
Source: Quartz


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