Cumulative merger and acquisition transaction values in the fertiliser industry have exceeded $25 billion (R195 billion) since May 2008, Moody's said on Thursday.
Releasing a report on how the spate of international acquisitions in the fertiliser industry could change global industry dynamics, Moody's said it also expected activity to continue in the short-to-medium term.
It warned that the nitrogen market was most at risk, given its high level of fragmentation.
"This consolidation activity had at first materialised among those industry players with a focus on the relatively fragmented nitrogen fertiliser market."
"However, the entry of large mining groups (BHP Billiton and Vale) through the acquisition of mining permits (e.g. BHP Billiton's Canadian acquisitions: Anglo Potash (owner of the Jansen Project), and Athabasca (owner of the Burr Project) in July 2008 and January 2010, respectively), which will be developed organically over the next 5-7 years, could have profound consequences for potash and phosphates industry dynamics," Moody's said.
The rating agency's analysis suggests the size of the potash reserves which will be developed by BHP Billiton in its Jansen and Burr projects (14 000 square kilometres of prospective exploration ground in the Saskatchewan potash basin) will add substantial new capacity to the market in the medium-to-long term.
Additionally, in 2009 Vale purchased Rio Tinto's Rio Colorado potash project in Argentina and its Canadian potash mining rights for a combined total of $850 million.
According to the Government of Saskatchewan, the region's potash industry will record an 88 percent increase in production capacity by 2020.
"We expect that a large portion of the new production capacity will be added by BHP's two new projects."
"The new production capacity coming on-stream over the next ten years could lead to overcapacities and possible pressure on prices, notwithstanding that greenfield/brownfield developments might only be pursued if potash demand/supply dynamics and hence price prospects for the industry remain attractive over time," Moody's said.
Vale's planned acquisition of fertiliser assets from Bunge Participacoese Investimentos SA (BPI) for US$3.8 billion, announced in January 2010, could lead to further overcapacity in the phosphates industry which Moody's expects to be already over supplied over the next two years.
"In our view, the transactions carried out by the mining giants were motivated by attractive long-term fundamentals (i.e. growing world population) for the fertiliser industry but also by synergy potential on the mining side, as mining equipment and know-how can be shared across mining assets," the ratings agency said.
Moody's also sees some counter-cyclical policies in these transactions, as price correlation between metals and fertilisers is not necessarily obvious.
BHP Billiton and Vale have more financial flexibility to drive both organic development and consolidation of the fertiliser industry.
This could possibly lead to a more competitive bidding process, higher valuations and development costs inflation in the future, with pure fertiliser players placed at a disadvantage versus much larger players in the mining industry.
"We anticipate that larger players in the industry and possibly other large mining groups will be potentially the greatest beneficiaries of this industry consolidation, with smaller fertiliser players and companies with Canadian potash mining rights being the most likely acquisition targets," Moody's said.
The ratings agency expects valuations to rise due to competition for the best assets as envisaged by PE ratios, which have recently diverged very significantly - ranging from about 10 to 30 across the industry (with potash and phosphate companies at the high end of the range for PEs and market capitalisation, and pure nitrogen companies at the low end), not least driven by merger and acquisition speculation. - I-Net Bridge