Potash Oversupply to Continue as Competition Rises

The price recovery may take longer than expected due to the imminent startup of new mines.

Potash prices are hovering around their lowest levels in a decade and the market may only slightly recover in 2017. According to major producers, the turnaround may take longer than expected due to the imminent startup of new mines.

Potash prices have languished around $200 per tonne for the past year, from their highs of $900 around 2008, and are currently slowly recovering at $215.

Adding to miners’ problems of oversupply and weakening farm income, new low-cost mines are scheduled to begin production.

K+S AG (ETR:SDF), which is ramping up its Legacy project in Saskatchewan, and EuroChem, which is opening two new mines in Russia, are just some of the companies bringing new production on stream.

“We continue to see fertilizer markets as challenged in the coming year as new supply ramps up and farmers keep a tight lid on expenses,” P.J. Juvekar of Citigroup said in a note.

But Kevin Stone, senior advisor with Natural Resources Canada, said at the 2016 Fertilizer Outlook and Technology conference in November that despite overproduction, the industry is “operating as it has for all but one of the last 15 years.”

Potash demand is expected to grow 2.3 percent from now until 2020, and could “grow as high as 36.5 million metric tons by the same year,” Stone said.

CEOs Optimistic

On Thursday, Canada’s Potash Corp of Saskatchewan Inc (TSX:POT), the biggest fertilizer producer, forecast a much less profitable year than analysts expected, and reported a surprisingly big drop in quarterly profit.

Despite this, Potash CEO Jochen Tilk remained positive and said that “a modest recovery” is ahead this year with the company expecting sales to rise to between 8.7 million and 9.4 million tonnes, from 8.6 million in 2016.

As of today, shares of the company are sitting at $24.06, a year-to-date fall of 0.95 percent. The company also forecast earnings of 35 to 55 cents per share in 2017, with the midpoint, 45 cents, being its second-lowest profit per share in 13 years.

What’s more, Potash Corp’s fourth-quarter earnings plunged to $59 million, or 7 cents per share, from $201 million or 24 cents per share a year earlier.

Despite this, Tilk said: “We sees signs that things are getting better.” But Potash has announced that it will cut production in 2017 shutting down some of its facilities during the first half of the year.

Chuck Magro, CEO of Agrium Inc (TSX:AGU), that plans to merge with Potash by mid-2017 to cut costs, agreed with Tilk and said: “Oversupplied conditions may improve between 2020 and 2022.”

Shares of Agrium are currently at $133.15, a 1.34 percent fall year-to-date.

“The markets are very, very competitive right now and (the merger) is the only way that we can compete,” Magro added.

Reginald Bellrose, First Nation Chief of Muskowekwan, that partnered with Encanto Potash (TSXV:EPO) to build a $3-billion potash mine on the reserve, also sees the downturn in the potash market as temporary.

“As the cycle uplifts and moves toward better pricing, I believe that our project will be viable.”

The feasibility and engineering studies for the Muskowekwan mine are underway and Bellerose said construction could begin in the next two to three years. By that time, he expects the oversupply issues to be resolved.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

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