Potash Outlook 2018: Weak Prices a Risk for Market

2016 was a challenging year for potash, but major market participants say 2017 brought improvements.
“Potash is certainly affordable. In terms of pricing we’ve seen a good appreciation. Prices are up, year-over-year, approximately 20%,” said Jochen Tilk, CEO of major potash and phosphate producer PotashCorp (TSX:POT,NYSE:POT) at the Citi Basic Materials Conference in November.
PotashCorp saw an average realized potash price of $179 per tonne in the third quarter, up from $150 in the year-ago period. Mosaic (NYSE:MOS), another key producer of potash and phosphate, notes that in Q3 its average MOP selling price, FOB plant, was $182, up from $160 a year ago.

The World Bank says in a Q4 report that top consumer China increased its potash imports by over 25 percent during the first eight months of 2017, creating firm demand. Tilk pointed to a number of additional areas as sources of potash demand, commenting, “you can see that the demand story is really driven by China and India for potash and Asia and South America. As expected, not so much by North America.” 
Improved potash prices in 2017 translated into more lucrative supply contracts for some of the main players in the space. For example, in July, Russian fertilizer producer Uralkali (MCX:URKA) signed a new contract with India through June 2018 at $240 per tonne; that’s $13 higher than the previous year. The same month, Uralkali signed a contract with China at $230 per tonne, up from $219 in 2016. 

Potash outlook 2018: Supply and demand

Despite increases in 2018, potash prices remain under pressure, and oversupply is still a risk.
About 95 percent of potash is used in fertilizers, and the World Bank notes that fertilizer prices are forecast to decline by 4 percent in 2017 before falling further in 2018. It also says that “continued oversupply conditions amid weak demand are contributing to the downward pressure on prices.”
The firm also notes that while fertilizer application has been increasing, it remains constrained by relatively weak crop prices, which in turn reflect well-supplied agriculture markets. It anticipates that fertilizer prices will ultimately strengthen moderately over the medium term due to “anticipated growth in demand and higher energy costs, which may incentivize new capacity.”
Similarly, a recent report from Zacks Investment Research warns that PotashCorp “remains exposed to a weak pricing environment,” and notes that “potash pricing remains under pressure due to elevated global inventories.” The World Bank says that the potash market is set to remain in oversupply, with new capacity expected in Belarus, Canada, China, Russia, Turkmenistan and the US.
It’s worth noting that some companies appear to recognize the need to hold supply back from the market. This past August, BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT) said it would delay a decision on its proposed Jansen potash mine in Saskatchewan. The world’s largest miner said it would not ask its board for approval for Jansen in 2018 despite continued progress at the site. 
Explaining the delay, BHP said it is anticipating a later “market window,” and is considering its options to maximize project value. Potential steps include “further improvements to capital efficiency, further optimisation of design and diluting our interest by bringing in a partner.”
“We need to assume a potash price of $400 per tonne” for BHP to proceed with the project, Citigroup Global Markets analyst Heath Jansen told the Financial Post. Odlum Brown analyst Fai Lee added that it could take as long as until the mid-2020s for the market to accommodate a mine of Jansen’s size.

Potash outlook 2018: Key factors to watch

In 2018, a number of central players in the potash market are set to make important changes, with the most notable being is the anticipated merger between PotashCorp and Agrium (TSX:AGU).
The deal has been a hot topic throughout the year, and as of December 27, the companies had received all regulatory approvals required for it to move forward. The transaction is expected to close on January 1, 2018, and the combined company will be called Nutrien; it will be the world’s largest potash producer, with operations in 18 countries.
“The markets are very, very competitive right now and (the merger) is the only way that we can compete,” said Agrium CEO Chuck Magro at the beginning of 2017.
For its part, Mosaic expects to close its acquisition of Vale’s (NYSE:VALE) fertilizer unit. “Once the acquisition of Vale Fertilizantes is complete, we expect to transform our vertically integrated business in Brazil into an upstream and downstream fertilizer powerhouse,” said President and CEO Joc O’Rourke in the company’s Q3 results release. 
O’Rourke added, “the combination of strong demand, lean channel inventories and minimal production from new capacity next year underpins our constructive near-term potash outlook.” The company sees its Esterhazy K3 project ultimately improving its position as a low-cost potash producer.
Other additions to the market will include the planned ramp up of EuroChem’s Usolskiy potash project in Russia as part of a staggered commissioning schedule during 2018. In addition, K+S Potash announced that its Bethune mine produced its first tonnes of potash in June and should reach its annual production capacity of 2 million tonnes by the end of 2017.
Also of interest in 2018 is the news that China’s Ministry of Finance plans to lower export taxes on nitrogen, phosphorus and potash to $15.14 per ton from the current rate of 20 percent of total shipment value. The move could boost shipments to overseas customers.
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: 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.