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Potash markets are facing tough times even though declining grain yields have led to ever-higher food prices.
Alongside concerns about falling yields and rising food prices, potash producers are facing the short-term consequences of slow global growth and are deferring capital expenditures on new mines.
The past two weeks have seen several potash producers halt mine production or shelve plans to progress mine development in response to a softening market in which billion-dollar expansions are not feasible.
Last week, the long-suspected delay in BHP Billiton’s (ASX:BHP,NYSE:BHP,LSE:BLT) Saskatchewan-based Jansen project came one step closer to reality after BHP announced that it will defer new project expenditures for the remainder of the 2013 fiscal year, which ends in June of next year. Instead, the company’s CEO, Marius Kloppers, told reporters and investors in a conference call that Jansen has “pre-commitment capital [of $1.2 billion] that is going to keep them very busy and productively busy for the year.”
The $68 billion in deferred project expenditures at Jansen is raising questions about BHP’s ability to meet the company’s 2015 start-date target.
And Jansen is just one Saskatchewan project that is being delayed.
Citing “challenging economic times,” Brazilian miner Vale (NYSE:VALE) announced on August 16 that it has decided to postpone its planned Kronau potash project, located southeast of Regina, Saskatchewan, in favor of other priorities.
The Kronau project, originally purchased in 2009 from Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO), is slated to produce up to 2.9 million metric tonnes of potash annually, and production was to begin in 2015. But Vale has now bumped the project to an undetermined date within the company’s “longer-term plans.”
On the same day, potash giant PotashCorp (TSX:POT) announced that it plans to temporarily sideline operations at its Lanigan project between September 15 and October 13.
As large global companies scramble to deal with shrinking profits and less cash for big ticket expenditures, their combined deferred spending and suspended production speak to the market’s short-term reality and not to its long-term aspirations.
Melbourne-based BHP announced a fall in net profit of 35 percent to $15.4 billion for the 12 months ended June 30. Vale and PotashCorp also saw lower profits than expected, with Vale announcing a near 60 percent slide in Q2 net profit compared with last year and PotashCorp missing earnings per share expectations despite increased revenues.
Global food prices
Ongoing drought and weather conditions in the US this summer continue to guide the market for food and fertilizers needed to grow crops.
Sliding soybean and corn yields from the US and wheat yields in Russia have led to a rise in global grain prices this summer. That rise has driven a push for stocks in fertilizer producers and the commodities that constitute the fertilizers.
The situation is serious enough that it has drawn the attention of the G20, a global governance group of 20 powerful national economies. It commented that “the current market situation is worrying,” but is not yet a security threat as it was during the 2007 to 2008 global food crisis.
While the G20 awaits further guidance from the US Department of Agriculture’s September corn and soybean crop numbers, it hopes to find solutions to limit the volatility in agricultural markets and better manage the agricultural crisis.
Farmers and agricultural markets are preparing for diminished yields of key agricultural commodities and the higher food prices that accompany them. Investors must consider whether the long-term demand for increased food production means continued bullishness on fertilizer inputs despite the short-term retrenchment seen in the Saskatchewan-focused potash miners noted above.
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company or commodity mentioned in this article.