Potash Outlook 2016: SOP Expected to Shine

For the potash market, 2015 has been a year of stagnant growth, with oversupply and prevailing weakness in emerging global economies hurting the space. 
Prices for the fertilizer are currently sitting at US$282, a $15 drop from prices seen at the end of the first quarter. And with potash prices still in a multi-year slump, the odds are not in favor of a turnaround in the coming year.

Oversupply hurting the market

Since Uralkali said “adios” to its partnership with Belarusian Potash Company in the summer of 2013, the potash market has not been the same. The collapse of the European potash cartel shook the market, sending potash prices down by 25 percent and creating an environment in which sellers could more readily offload their product.
Explaining the situation this past September, Macquarie analyst Daryna Kovalska told the Financial Post that “in a ‘post cartel’ world, the producers lack the discipline to reduce supply enough to bring it in line with demand.”

Because producers are not curbing production, the biggest potash consumers — such as China — are sitting with large stockpiles of the fertilizer. That means demand, and of course prices, are depressed.
Potash companies don’t seem surprised that oversupply is such an issue. Indeed, when asked about his expectations heading into 2015, Paul Donaldson, CEO of ASX-listed potash development company Danakali (ASX:DNK), told the Investing News Network (INN) that he “expected that the potassium chloride (MOP) market would see price declines throughout the year as a result of new capacity entering the market”
However, Donaldson also pointed out that “there is a perception that the potash market is oversupplied in general, [but] it is in fact only MOP that is experiencing oversupply, while sulfate of potash (SOP) continues to demonstrate high prices and remains supply constrained.”
Looking at how oversupply has impacted the potash space, Donaldson commented that it’s led to potash development projects being put on hold.
“Continued volatility in the commodity markets in general has eroded investor confidence,” Donaldson said, highlighting that development projects tend to have a longer lead time, and noting that when investors react to the current potash market, it causes supply problems down the line. “Potash investment is about the future market and not the current market.”

Potash outlook for 2016

It might be hard to look for upside in the potash space when the last year featured such negative price movements.
And indeed, AHDB sees potash prices affected by “downward pressure […] for the foreseeable future.” The firm has pointed to continued oversupply for MOP, which, as mentioned, has been weighing heavy on the market.
Speaking about the potash outlook for next year, Donaldson also said he sees continued weakness in the MOP market; however, optimistically, he believes “the market has bottomed out.”
“2016 will see stable pricing with a gradual recovery over subsequent years,” Donaldson told INN, adding, “we expect to see SOP prices slightly decrease, but effectively they will remain very robust throughout the 2016 period.”
In closing, Donaldson again stressed that there is a fundamental difference in the types of potash, with SOP having more limited primary production and few economically exploitable resources. “Therefore, despite the weakened MOP prices, SOP prices not only will remain strong, but will also maintain a premium over MOP. Secondly, newly commissioned capacity for potash will be absorbed into the market over the coming years and there will be a price recovery.”

Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any of the companies mentioned in this article.
Editorial Disclosure: Danakali is a client of the Investing News Network. This article is not paid-for content. 
The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Related reading:
Potash Outlook 2015: Watch Oil Price for Near-term Clues