The population is growing. We are
fast running out of arable land and developing populations are
changing their diets to include more meat. Fertilisers play a
key role in meeting the challenge of whether we are to have
enough food to survive.
This is the message that has been
perpetuated over the last few years by fertiliser producers and
juniors alike. However, what was initially a sure thing has now
turned into a long-game. In 2012, market players insisted that
2013 would be better. However, when Uralkali announced it would
withdraw from its joint venture marketing company, Belarusian
Potash Co. (BPC), demand waned and agriminerals prices
plummeted in mid-2013. Reassurances were furiously churned out,
asserting that the slump was temporary and that 2014 would be a
turning point.
Of course Uralkali alone cannot be
held accountable for the low point the market faces; a number
of factors converged to contribute to the situation of
overcapacity that potash, phosphate and nitrates markets find
themselves in today, but the end result is the same. Globally,
there are a large number of fertiliser producers looking to
expand capacity, and a large number of juniors trying to pluck
what was, back in 2008, seen as low-hanging fruit.
The question that must now be asked
is, has demand been overstated and is there enough of it to go
round?
Potash overcapacity
The shape of the potash market
changed in 2013 when, following a dispute over trade outside
its Belarusian Potash Co. marketing joint venture with
Belaruskali, Uralkali decided to break away from the
partnership.
According to Alberto Persona,
potash and phosphate analyst at CRU, Uralkali greatly affected
the market, not with its decision to leave, but with its
announcement that it expected prices to fall by over a
third.
Uralkali’s strategy to
compensate for falling product values has been to adopt a
volumes over prices strategy by increasing output, and, to this
end, the company has been operating at close to full capacity,
producing 10m tonnes potash in 2013.
However, Uralkali was not the only
company to ramp up volumes in what has been a largely
unsuccessful attempt by major producers to mitigate price
declines.
“The problem with potash is
that there is currently so much capacity,” Persona told
IM. “Uralkali does seem to be taking a
more sensible approach now to allow demand to grow by pulling
out of production. Uralkali, PotashCorp. and EuroChem are all
carrying out expansion programmes, however, Uralkali thought it
could increase production and still make the same margins, but
that hasn’t been the case.”
Regional demand
Persona doesn’t anticipate
that many potash juniors will make it to full production,
though the end result will depend on which regional markets are
being targeted.
“Some juniors are choosing to
target India, but they depend on financing, and that’s
what it comes down to. In an environment such as the one that
we are in now, it will be very difficult to secure
financing,” Persona told IM.
He predicts that by 2020, most
producers will be operating at around an 80% mining rate and
that Brazil is the market to target.
“China has hit a land
constraint. Brazil is expanding, while the US is pretty
flexible in terms of the land it needs,” Persona told
IM.
Africa too, could potentially
represent a huge future opportunity for potash producers,
however, Brazil remains the market with the fastest growth in
demand.
Demand had, in 2013, seen a slump,
but low prices have caused a surge in demand over the first
half of 2014. According to leading Russian producer Uralkali,
which is planning an 80% increase to 19m tpa potash by 2021
through various expansion projects, demand over the second
quarter of 2014 increased over the first, with the overall
supply picture remaining tight.
According to ANDA figures, imports
to Brazil increased 24% year-on-year to 4.5m tonnes potash for
the first six months of 2014, with imports expected to remain
stable throughout the third quarter.
“In 2014, potash import
volumes are expected to exceed last year’s record level,
reaching 8.4-8.6m tonnes,” Uralkali said in its latest
market update.
Demand in North American markets
also remained strong, as producer inventories were down 20%
y-o-y, pushing up prices and driving up expectations for strong
demand through the rest of the year to restore depleted dealer
inventories.
A tough market to enter
According to phosphate producer
EuroChem, which is looking to become self-sufficient in all
three fertiliser nutrients, there is room for growth in the
potash market because of the existing supply demand
balance.
“Until about 2006 things
stayed low, and then the world caught up with itself,”
EuroChem’s mining director, Clark Bailey, told
IM. “The ratio of NPK producers to demand
was almost 100% - that’s almost unheard of. Now it’s
probably in the 80s, which means there is still room to
continue to grow.”
With potash consumption expected to
continue to grow globally by between 1-4%, EuroChem, which
hopes to begin potash production by 2017, is looking to help
plug this gap.
“It’s going to be 2017
before we’re in production, it takes very capital
intensive programmes and it takes a really long time to get one
of these mines done,” Bailey said.
“Existing producers will tell
you that over and over again, and that’s because there are
so many people standing at the gates saying they want a part of
the market. We’re saying that’s fine; all you’ve
got to do is have money and have patience, and not a lot of
people have that,” Bailey added.
Another big position for market
entry is access to high quality, cost competitive reserves,
which is very much to do with logistics. In this respect, a
company must either have the financial backing to be able to
develop good infrastructure, develop a resource in an area with
pre-existing infrastructure, or, as is the case with EuroChem,
already be in production to exploit its synergies with existing
facilities.
“Once these two mines come on
board [potash mines Volgakaliy and Usolskiy] we already have a
good logistics group; we have a lot of rail cars and understand
how to move things around and we are using these existing
ports, so we’re going to piggy back on what we already
know how to do that,” Bailey said.
According to EuroChem’s
calculations, compared with the large producers in
Saskatchewan, the company’s bill to transport its products
to market will be much lower, with only 500km from Volgaliy to
the Black Sea.
“We have a price advantage to
other people and I think we’ll be able to compete with
them well,” Bailey said.
Indian phosphate situation
“At the end of 2013 the
phosphate market was terrible, but there has been a huge
rebound in spot prices since,” Persona told
IM, adding that the rebound was excessive
because of delays in Morocco and early buying from Brazil.
However, what happens in India is
likely to tip the phosphate market.
Persona anticipates that over the
next year the Indian government is unlikely to change the urea
subsidy, meaning that nothing big is expected from the country
in the short term.
“Changes will occur over the
next year, but these will be slower than some might hope,”
he told IM.
The subsidy system in India is
currently skewed in favour of nitrogen; a political move as the
benefits of nitrogen fertilisers can be seen much more quickly
compared with potash and phosphate fertilisers.
“The other thing that you have
to remember is that 80% of yield is down to water; that is why
the Indian government is focusing on water and irrigation
investment rather than the subsidies,” Persona said.
According to Persona, the future of
phosphate growth is largely dependent on India, though South
East Asia and South America are seeing growth in demand.
“I think that China has peaked
and is no longer a growth market for phosphate,” Persona
told IM. “Phosphates are more likely to
enter into oversupply, especially considering the additional
supply planned from Morocco and Saudi Arabia.”
However, he added that new
producers could still potentially displace existing producers,
or alternatively bring on an additional supply of raw materials
for existing producers.
Phosphate overcapacity
As is the case with potash, the
path from greenfield to production is a lengthy one, with
similar challenges determining which juniors will make it in a
tough market in areas such as financing, the ability to take
advantage of existing infrastructure and proximity to target
markets.
On the whole, according to Persona,
offshore fertiliser supply, such as that in development by
Leviev Group off the coast of Namibia and Chatham Rock
Phosphate (CRP) off the coast of New Zealand, is unnecessary,
particularly when these projects, which use new and risky
technology, will be relying on financing in an already
uncertain market.
“Chatham Rock Phosphate’s
offshore project also makes sense because currently the country
needs to import all of its phosphate supply from Morocco,”
Persona told IM.
Australia imports much of its
phosphate requirements while New Zealand imports 100% of its
requirements and CRP hopes to absorb some of this demand with
its offshore project, as well as create a more environmentally
friendly option for the region as phosphate will not need to
travel such long distances before it gets to market.
Another junior in the area,
Australia’s Potash West, is also hoping to bring online a
secure supply of phosphate for the area. The company initially
began with a focus on potash but has more recently shifted its
attention to its phosphate resource at the Dandaragon project
in Australia.
According to the company, its
phosphate opportunity has lower capital costs and is less of a
risk than its proposed potash project as it uses existing
processing technology and has access to infrastructure in
Western Australia. Potash West also expects that, as Australian
farming becomes more scientific, application rates for both
potash and phosphate will increase with farmers in the region
less likely to take gambles.
“There are a number of mines
in the area already. The project is large scale and is
attractive to investors, and as Australia imports all of its
phosphate requirements at the moment, fertilisers are a low
hanging fruit which will help to increase food
production,” the company’s MD, Patrick McManus, told
IM.
Fertiliser
prices
The general consensus is that
potash and phosphate prices have both reached a floor, although
Persona told IM that phosphate prices may dip
slightly again against 2014 levels.
He also added that although some
analysts expect an improvement in potash prices, if Belaruskali
and Uralkali re-establish a joint venture, a get together
between the two companies would not be as significant.
“It was Uralkali’s
announcement that had more of an effect on prices than
anything, rather than the actual split,” Persona told
IM. “But, if BHP plays, then it’s a
different question.”
The latest market analysis from
PotashCorp. has shown that prices for fertiliser minerals,
including potash, diammonium phosphate (DAP) and sulphur, have
held on to gains seen in the first six months of this year.
According to the company’s
monthly market data, prices for potash (KCl, spot, standard
grade) have been stable at slightly above the $300/tonne mark
on an FOB Vancouver basis, with a weakly positive trend
pointing to a robust market.
DAP (spot) prices are recorded as
being in the $450-480/tonne range at the mid-year point on an
FOB Central Florida basis, having climbed from below $400/tonne
at the start of this year.
Sulphur prices are reported to be
around the $170/tonne mark and climbing towards $200/tonne on
an FOB Central Florida basis.
Market sources recently told
IM that the market for fertiliser minerals was
steady, but with improving fundamentals.
In July, PotashCorp.’s new
CEO, Jochen Tilk, said that he will continue with the
company’s existing strategy of prices over volumes.
Shutting new producers
out
According to Persona, the
oversupply in fertilisers will take out the inefficiencies and
the fringe producers, making it a more efficient industry.
“It’s still a profitable
industry to be in, but not as profitable as it was
before,” Persona told IM. “It does
however make sense for existing producers to expand and cut
juniors down, depending on existing capital or if they need to
reduce their interest on outstanding debt.”
Junior producer, Highfield
Resources, which is developing four projects in Spain, told
IM that as the market has become more
challenging in recent years, it is in the best interests of
existing potash producers to keep fertiliser prices low.
This is particularly true in
potash, Anthony Hall, Highfield’s managing director, said:
“It is not in the interests of the current producers for
prices to go over this level, as this level is likely to
trigger BHP«s market entry and a lot of additional non
producer projects. In this market context you really need a
project with low capex, quick speed to market and other margin
advantages like logistics and domestic customers.”
He added that the company believes the current producer
oligopoly will show restraint to ensure prices move to a point
that maximises profits whilst keeping out the majority of new
producers.