Is there any room for additional fertiliser supply?

By Kasia Patel
Published: Tuesday, 29 July 2014

Owing to its solid long term fundamentals, producers and juniors have been developing new fertiliser projects. But with recent developments, lower prices and uncertain demand, this is not a race that all will finish.

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.