SUPPLY SITUATION REPORT: Potash: things can only get better

By Kasia Patel
Published: Thursday, 20 February 2014

The potash industry has experienced its share of ups and downs over the last few years. Senior Reporter, Kasia Patel, takes a look at the highs and lows of 2013 and asks whether producers think this year will be any better.

There is no doubt that the last year has been a tough one for the potash industry. While producers entered 2013 with optimistic expectations for the market, recovery from the collapse of the commodities boom was slow to materialise, and, just when demand began to pick up mid-year, changes in the structure of the market once again brought uncertainty.

However, lower potash prices seem to have restored some demand and recent agreements between producers and buyers, specifically in China, indicate that they are unlikely to fall any lower. Now potash producers and juniors alike have once again entered into a new year with the hope that the worst is behind them.





SUPPLY SECURITY

The vast majority of potash is found in Canada and Russia, which hold potash reserves of 4.4bn and 3.3bn tonnes respectively, of the world’s 9.5bn tonnes total, according to the US Geological Survey (USGS). Figures from Russian potash producer, Uralkali, indicate that the oldest reserves in Russia were formed between 275m and 290m years ago, while Canadian deposits formed around 370m years ago under the earth’s surface. Deposits in the UK, Germany and Brazil formed underground between 250m and 120m years ago.

Potash from these older deposits is extracted via conventional mining, and production from newer reserves in Chile, China, Israel, Jordan and the US comes from salt lakes. Currently, approximately 80% of potash is obtained through mining, 12% from water evaporation from salt lakes and the Dead Sea, and 8% from the underground water dissolution of salt deposits.

The majority of potash is consumed by the fertiliser industry, as potassium is an essential plant nutrient with no substitute. Although manure and greensand are other sources of fertiliser, these are low-potassium options which can only be transported short distances.

The most recent figures from the USGS show that over 60% of potash produced in the US in 2012 was muriate of potash (MOP). Other types of potash required by specialist crops, such as sulphate of potash-magnesia (SOPM) and sulphate of potash (SOP), were also produced.

Major producers

Following the pattern of global potash reserve distribution, the major producing companies are located in North America and Eastern Europe.

PotashCorp.

PotashCorp. is the leading potash producer in terms of global capacity. The company owns six potash mines in Canada with a total capacity of 11.9m tonnes.

Lanigan (3.8m tpa) and Rocanville (3m tpa) are the company’s two biggest potash mines, before Allan (1.9m tpa), Gary (1.4m tpa), Patience Lake (1m tpa) and New Brunswick (0.8m tpa). PotashCorp. sources its potash from deposits in Saskatchewan, and is currently expanding its production capacity for which, at the close of 2013, estimated expenditures for its multi-year expansion programme were 92% complete.

Agrium

Producing the three main fertiliser nutrients, nitrogen, potash and phosphate, Agrium’s sole potash plant at Vanscoy, Saskatchwan produces just over 2m tpa potash, making it the 10th largest potash producer globally.

The Mosaic Co.

As the leading fertiliser producer in the US, Mosaic has a larger phosphate production capacity, but the company also has the capacity to produce 10.4m tpa potash. However, Mosaic’s production has dropped since 2012, its most recent figures indicate the company was operating at 65% of operational capacity over the fourth quarter of 2013.

Together with Agrium and PotashCorp., Mosaic owns Canpotex, an international marketing and logistics company which markets and distributes potash from Saskatchewan globally to Asia, Latin America and Oceania.

Despite recent challenges faced by the market, Mosaic is one of a handful of existing potash producers that continues to expand its production facilities, and, in the fourth quarter of 2013, the company completed a successful run at its Saskatchewan Esterhazy mine.

“[The run] exceeded the expansion’s design capacity by 20%. As a result, Mosaic’s Canpotex sales allocation increased from approximately 39.9% to 42.5% beginning in January of 2014,” Mosaic said.

The company’s full expansion is expected to be completed by 2021, and is taking place at Belle Plaine, Colonsay, Esterhazy K2 and Esterhazy K3.

Intrepid Potash

Intrepid Potash is the largest US producer of muriate of potash (MOP) and according to the company, it has supplied on average 1.6% of global annual potassium consumption and 9.3% of annual US consumption.

The company’s production facilities are located in the US, three in New Mexico and two in Utah with an estimated production of 870,000 tpa potash. According to its latest set of figures, production for 2013 fell to 780,000 tonnes potash from 790,000 tonnes in 2012, while sales of potash fell to 692,000 tonnes.

ICL

ICL is the sixth largest potash producer globally, extracting the mineral at Israel’s Dead Sea, as well as from underground mines in Spain and via its subsidiary, Cleveland Potash, in the UK. The company produced 4.93m tonnes potash in 2012, which increased to 5.16m in 2013, and has a production capacity of 6m tonnes.

The UK’s only potash mine, Cleveland Potash produces over 1.5m tpa potash for fertilisers and agricultural uses.

The company confirmed last year that it plans to extend its UK Boulby potash mine from 4.3m tpa potash to 5.3m tpa potash, creating more than 270 jobs by the end of 2015. ICL is set to invest £300m ($502m*) in the area over the next five years.

ICL also confirmed a strategic alliance with Canada exploration and development company Allana Potash to develop the Danakhil project in northeast Ethiopia.

The feasibility study (FS) for the proposed mine, located in the Dallol depression of the Afar province, on the Horn of Africa, indicates that it will produce approximately 1m tpa potash over five years.

Uralkali

Uralkali holds 20% of the market share, producing around 11m tonnes KCl. The company has been operating at close to full capacity, producing 10m tonnes potash in 2013, and is currently rolling out a major expansion project. Total projected investment in the expansion is $2.3bn, which will help to increase its capacity to 15m tonnes by 2020.

The programme also includes the possibility of expanding the designed capacity to 19.2m tpa through the implementation of the project’s stage 2 Polovodovo and Solikamsk -3, now in the design stage. The final decision on the additional ramp-up will be made in 2015, depending on market conditions.

Belaruskali

Belaruskali, Uralkali’s previous Belarusian Potash Co. (BPC) partner, exported around 3.7m tonnes potash fertiliser in in 2012, down from 4.7m in 2011. The company is expected to increase its production capacity to 12.5m tpa by 2020, from 8.8m tpa in 2011.

K+S

Another existing producer expecting to increase production capacity is Germany-based potash producer K+S AG, with plans to invest Canadian dollar (C) $3.25bn ($2.9m) to produce 2m tpa potash from 2017 and reach 2.86m by 2023 at its Legacy potash project in Saskatchewan, Canada. This project could be expanded to 4m tonnes by 2034.





MARKET DEMAND

The majority of potash produced globally is consumed by the fertiliser industry, with an estimated 90-95% of production being used in fertilisers, and the rest for other industrial purposes.

The USGS predicts world consumption of potash will grow by 3% a year until 2016 driven by a rising population and a demand for food and biofuels, and although there are many new projects in development, existing producers are hoping to absorb new demand through expansions and production ramp-ups.

Despite fundamental market drivers such as population growth and a Westernisation of diets in developing regions - a growing middle class means more disposable income to be spent on fruit, vegetables and meat, all of which require more fertiliser - 2013 was not an easy year for the industry.

In its 2013 full year financial results, released in February 2014, PotashCorp. said that “challenging fertiliser market conditions impacted our performance”. In November 2013, Mosaic’s CEO, Jim Prokopanko referred to the company’s weak results caused by “challenges in the environment in which we operate”, while Uralkali’s head of sales and marketing, Oleg Petrov, described potash demand as being in “a prolonged, steady decline” following the demand highs of 2011. Whichever way one looks at it, 2013 was a difficult year for the potash industry as demand dropped, buyers held off from purchases and investors lost confidence.

Uralkali’s earth shattering announcement

Referred to by some analysts as “the end of the potash world as we know it”, Uralkali’s decision to exit from its BPC marketing arrangement with Belaruskali will undoubtedly be remembered as one of the defining potash industry moments of 2013.

The company chose to withdraw from BPC after a meeting with its board of directors on 29 July 2013, opting to direct all export volumes through Uralkali Trading, following a disagreement with Belaruskali over export activities.

The move was coupled with an announcement from Uralkali anticipating that increased competition would put pressure on potash prices, driving them down to under $300/tonne by the end of 2013, but the company optimistically added that “still, the price is likely to remain higher than $200/tonne, which is the cost of production for marginal potash producers.”

Although some producers hit back, disputing Uralkali’s price forecast, the initial impact on the market was tangible.

US-traded shares of PotashCorp. fell 16.5% to $31.63/share, Mosaic shares fell 17.3% to $43.81, shares for Intrepid Potash sank 28.6% to $13.89; while Agrium dropped 5.4%, to $86.50/share.

Uralkali’s shares fell 19% to Russian ruble 151.92 ($4.32), its biggest drop since the end of 2008 while ICL share dropped 17% and K+S shares plummeted by 24%.

Major producers were forced to implement cost cutting measures, and PotashCorp. was one of the first to announce it would need to reduce its workforce in response to global challenges faced by the potash market.

With prices hovering just over US$300-325/tonne, some companies expect that cost containment will still be the order of the day for even the low-cost producers, even with a moderate price recovery expected over the ensuing months.

Demand revival

In spite of price drops and buyers holding off on purchases hoping for bigger potash discounts, producers began to see a slight revival in demand at the end of 2013 as lower prices have had a positive effect on demand by making potash more affordable.

According to ICL, the fourth quarter of 2013 saw a resumed demand for potash as prices stabilised, and the company saw imports of potash to Brazil last year reach 7.6m tonnes, an increase of 3.5% over 2012.

“Based on a report published by the US Department of Agriculture (USDA) in January 2014, an increase is expected in the ratio of the inventories of grains to annual consumption, to a level of 20.15% at the end of the 2013/2014 agricultural year, compared with 19.60% in the prior agricultural year and 20.19% in the 2011/2012 agricultural year. Most of the increase stems from the inventory of corn,” ICL said.

North American producers also reported a demand revival, as at the end of 2013 and start of 2014, dealers with limited inventories in North America sought to ensure tonnage was in place prior to the spring. PotashCorp. anticipates that this demand will continue, with shipments in the first half of 2014 will outpacing those in 2013.

The India question

Although a return in demand has been seen in developing countries like China, India is likely to remain a problematic market for potash producers.

Russia's largest mineral fertiliser producer EuroChem, who is developing its own source of potash in Russia and expects raw ore production to begin in 2017, told IM that much of the demand constraint over the last two years has come from India due to its outdated subsidy system which is skewed to nitrogen, as well as a severe currency slide.

“Additionally, parliamentary elections in May mean that very little spending on subsidies will take place until a new government is formed and electoral promises fulfilled,” the company’s mining director, Clark Bailey, told IM.

In May 2013, the Indian Government outlined plans to cut its subsidy on potash and phosphate fertilisers by 15% in its 2013-14 budget. The subsidy for diammonium phosphate (DAP) was cut for the second year in a row to Indian rupee (INR) 12,350 ($199.6)/tonne, a 14% decrease, while the subsidy for MOP was cut by 22% to INR 11,300 ($182.5)/tonne.

However, Bailey added that with close to two years of limited buying and application levels in India, a return in demand should be driven by the need to replenish the soil’s nutrient balance.

“According to the FAI PIS in 2009 and 2010 India had imports of 5.5-6.0m tpa MOP and this was down to 2.8m tonnes MOP in 2013. Additionally according to Fertecon, over the last few years Indian farmers have been applying an average of 5m tonnes of MOP annually,” he said.

Investing in Africa

Potash is one of several underdeveloped minerals in Africa as the continent currently lacks the capacity to process or consume many of the minerals it can produce.

Several potash juniors though, such as ASX-listed Elemental Minerals developing the Sintoukola potash project in ROC, West Africa, have chosen to invest in the region. However, where Elemental plans to target South America with its potash, saying that the African market “isn’t there yet”, other companies like Allana Potash anticipate that Africa will become a major power house with investment from the Middle East, China and Russia.

According to Allana, the African market is underserviced by the potash market as the entire continent consumes about 800,000 tonnes potash, and the company has no doubt that this amount could increase up to 8m tonnes in 10 to 12 years.

The company’s project is located at the Dallol potash site in the Danakil depression, Ethiopia, a country where traditional farming methods utilise only two fertilisers to supplement soil nutrient content - diammonium phosphate (DAP) and urea - neglecting potash fertiliser application.

And, Allana has not come up against some of the issues that other juniors have when working with local authorities, according to Richard Kelertas, Allana senior vice president corporate development.

“We have found that Ethiopia is open for business, so the challenges that one would normally experience in Africa have been largely mitigated to a large degree in this country,” Kelertas said.

“[The project’s] remoteness has been a minor issue, but we are in the midst of the latter stages of securing our debt financing for the project and are working towards signing on a strategic equity investor, so in fact the project’s location has been an advantage - a hot climate which is conducive for the solution mining process,” he added.





PRICE TRENDS

Before Uralkali’s change in strategy, producers were anticipating a slight downturn in prices, however the company’s shock announcement caused potash prices to drop by an average of 25%.

PotashCorp said that over the course of 2013, competitive pressures weighed on all potash markets and led to lower average realised prices for the fourth quarter 2013 of $282/tonne and full year $334/tonne relative to the same periods in 2012, while Mosaic saw its prices fall by 30% year-on-year, with an average fourth quarter 2013 MOP selling price, FOB plant, of $303/tonne, down from $435/tonne the previous year.

Now that agreements have been signed between Canpotex and China, and Uralkali and Chinese buyers for around $300/tonne, existing producers and potash juniors alike are optimistic that at least prices will not sink any lower.

“We can’t predict with certainty what global prices will do in 2014, but the initial signs of a moderate pricing revival are becoming more evident,” Kelertas told IM.

He added that should a repair in the marketing agreement between Belarus and Russia come into effect, it should help push prices up as it had a significant positive impact on pricing when the partnership was in full force.

Though Uralkali has said that it was too early to tell yet, the reinstatement of BPC would create underlying support for potash prices and the hope that potash production will pick up again in the future.

MARKET OUTLOOK

Many potash producers believe the lull in demand recently experienced by the industry to be cyclical in nature, and predict that while 2014 may still be difficult that the fundamental drivers of fertiliser demand remain supportive.

“Record crop production in 2013 has led to a significant agronomic need to replenish essential soil nutrients. We expect farmers, especially those in more developed agricultural economies, will strive to increase their soil productivity in order to maximize returns from each planted acre,” PotashCorp. said.

The company predicts that global shipments for 2014 could be in the range of 55-57m tonnes, an increase of around 5% from 2013 levels.

China is expected to remain a big driver of demand for potash, as improved product affordability and a desire to increase domestic food production to help counterbalance rising grain imports will motivate consumption growth, and 2014 potash imports are expected to be above 2013 levels, while solid demand is also being seen in Latin America.

“The world in general is under-applying potash and for crop yields to increase and just keep pace with global food demand growth over the longer term, application rates of potash have to increase and by significant amounts,” Allana’s Kereltas told IM.

“In the immediate term, global inventories are beginning to drop and the spring plant and advance fertiliser buying patterns suggest a better tone to the overall demand segment of the market.”



Potash prices to grow, say Goldman

Wayne Yamada

US banking group Goldman forecast that demand for potash will grow 4.3% in 2014 to 55.7m tonnes and by 3.4% in 2015 to 57.6m tonnes.

This follows a 15.6% fall in demand in 2012, but prices were maintained due to a simultaneous 21.1% fall in production, which kept the market in balance.

Prices were expected to fall below $300/tonne after the breakup of BPC, with Goldman predicting at that time that prices would fall to $275/tonne, due to increased competition and additional volumes on the market.

These extreme price falls did not materialise, however, with producers taking firm control of supply and keeping prices stable.

“The supply dynamics have recently changed in favour of better producer discipline, and we upgrade our price forecasts for 2014 and 2015 to $318/tonne (up 13%) and $310/tonne (up 3%) respectively,” Goldman commodity analysts said.

They added that prices bottomed out at $320/tonne after North American producers slashed production. This included Canada’s Potash Corp. idling around 2m tpa potash.

“In our view, Potash Corp. is a low cost producer so the fact that the supply response came from them rather than from competitors higher up the industry cost curve is surprising, even if the facilities in question have not been closed permanently and may resume production once conditions improve,” Goldman said.

Other bullish factors include reports that Uralkali and Belaruskai may be willing to revive the BPC joint venture, after Uralkali appointed Dmitry Osipov as its new CEO to replace Vladislav Baumgertner from 24 December 2013.

Baumgertner was arrested in September 2013 in Belarus, following a meeting with Belarusian Prime Minister, Mikhail Myasnikovich.

Despite these factors, Goldman also warned against a runaway bull potash market, citing additional mines coming online adding more production to the supply chain, which will more than offset mine closures.

“In our view, the backdrop of weak crop prices and the fresh memories of the collapse in producer discipline at BPC and the resulting demise of the potash price premium make it unlikely that producers will be able to secure significant price increases this year,” Goldman concluded.