Potash Prices Steady as Contracts Continue

Recent potash contract placements by some of the world’s largest buyers have raised hopes of a resurgence in the fortunes of potash companies and their investors.

Earlier this week, Israel Chemicals Ltd. (TASE:ICL), a fertilizer and specialty chemical maker, announced that it signed a deal to sell 550,000 tonnes of potash to Chinese customers in the second quarter of this year. The contract includes an option for an additional 120,000 tonnes, and is said to have been settled at around the same price of ICL’s 2011 contract with China at US $470/tonne.

The ICL contract was a continuation of purchases made by Chinese firms Sinofert Holdings Ltd. (HKG:0297) and Sinochem in late March, which have brought optimism to the otherwise dour potash market. Japan has also agreed to contracts delivering 550,000 tonnes of potash, while Indian purchases remain in a holding pattern on hopes of falling prices.

Bank of America Merrill Lynch analyst Andrew Stott has provided some analysis that may prove Indian buyers right, noting that “[w]e continue to see a slower season in Europe than last year and expect lower Indian imports.” India’s reduced nutrient-based subsidy, down more than US $30 to $294/tonne, came into effect earlier this week and will make it more expensive for individual farmers to buy the fertilizer.

As a result of this darker outlook and high stockpile levels, FOB Vancouver potash spot prices have fallen in 2012 from around US $500/tonne in January, settling at the end of March at US $483/tonne. Granular potash prices in Brazil have also fallen by about US $30 to $520/tonne for large purchasers.

But despite the short-term trends, Scotiabank Vice President of Economics and commodity market specialist Patricia Mohr remains positive that growing food demand will drive potash prices above US $500/tonne later this year. Concerns of drought in South American soybean and European wheat markets, and the rebound in canola, palm oil, and corn prices – all crops that require significant potash application per hectare planted – have also buoyed Mohr’s confidence in rising potash application in North America, Southeast Asia, and Brazil in 2012.

Investing in potash infrastructure

With short-term uncertainty in current potash markets, there is still a strong belief in the long-term outlook. The British Columbia provincial government announced earlier this week that Vancouver’s infrastructure needs an additional CA $700 million of investment in order to service the 24 million tonnes of potash expected to flow from Saskatchewan and Alberta by 2020.

Neptune Terminals, a key Asian “gateway” port on Vancouver’s North Shore, just finished a CA $49 million upgrade that increased its potash capacity to 11.5 MT/year.

Investment in Canadian mining has grown significantly in the past year, with capital expenditures in the sector hitting CA $16 billion and potash making up $2.9 billion of that total.

Companies like K+S Potash Canada (FWB:SDF) are a big part of this growth. Construction will begin at the company’s $3.25 billion Legacy solution potash mine near Bethune, Saskatchewan this June. The project is the first new potash mine in Saskatchewan in 40 years, and says a lot about the long-term outlook of Canada’s – and the world’s – potash prospects. K+S is looking to begin production in 2015, and plans to bring 2.86 MT/year of potassium chloride to market by 2023.

Junior mining news

Ethiopian Potash Corp. (TSXV:FED) appears to be in dire straits. After releasing a number of bizarre press releases in recent months, Mackie Research Capital analyst Jaret Anderson has now stated that unless the company drastically alters its current exploration program and spending, it will soon be unable to meet its financial obligations.

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