Supply Constraints Impact Phosphate Market

- October 11th, 2012

Tight supply and soft demand have pushed phosphate profits down. Mosaic, for example, registered a significant decline in phosphate sales.

Supply Constraints Impact Phosphate Market

Supply disruptions and muted demand for phosphate rock and fertilizers have left producers struggling to make a profit.

The world’s largest phosphate producer, Mosaic (NYSE:MOS), released its 2013 Q1 earnings results early this month. The company posted a US$97 million reduction in net earnings and a 30 percent reduction in phosphate sales, which dropped to $1.6 billion.

Extended annual maintenance shut downs played a key role in lower phosphate fertilizer output; production of finished product fell by 9 percent to 2 million tonnes.

The company also noted that natural events, including Hurricane Isaac and lower water levels in the Mississippi — which are making it difficult for barges to access key ports — also help explain why phosphate fertilizer output was lower for the period.

Lower demand also played a role in reducing Mosaic’s yearly figures. Phosphate rock output from Mosaic’s Florida-based operations increased by 36 percent during the same period, hitting 3.8 million tonnes of phosphate rock.

In addition, decreased prices have continued to challenge phosphate producers’ assumptions of overall demand as DAP selling prices have fallen. Mosaic noted that FOB plant prices have sunk from $576 to $529 per tonne over the last year.

Mosaic CEO Jim Prokopanko remains optimistic — in line with the company’s increased ore numbers — because the company believes farmers have a strong incentive to increase yields and their use of phosphate products.

“Drought and other weather-related issues in several of the world’s key agricultural regions severely impacted this year’s corn, soybean and wheat crops and provided a vivid reminder of just how tenuous global food security is,” Prokopanko said in Mosaic’s press release.

Conflict could destabilize supply

Beyond natural weather events, the ongoing political conflict in Syria has begun to rattle some phosphate investors’ confidence about phosphate supply.

Syria, home to the world’s 11th largest phosphate reserves, had planned to triple its phosphate production from around 3 million to 10 million tonnes annually, but ongoing hostilities within the country have made this prospect seem unlikely in the short term.

The Middle East and North Africa (MENA) region is a critical area for the phosphate market and is home to more than 80 percent of the world’s phosphate reserves.

European Union sanctions on phosphate exports were suggested earlier this year after conflict within Syria began to escalate. The EU later backed away from the sanctions, but said it may revisit them at a later date.

Company news

Australia’s Queensland state government announced last week that it has approved Legend International Holdings’ (OTC Pink:LGDI) Paradise South phosphate project’s environmental impact statement.

The project, which will have an operating cost of AU$200 million per year for its projected 20-year lifespan, may also include a AU$1.4 billion phosphate facility south of the town of Mount Isa.

Legend’s Paradise phosphate project is divided into north and south components. The south has 196 million tonnes of combined measured and indicated resources graded at 14.6 percent P2O5. Indicated and inferred resources at Paradise North are a combined 15 tonnes graded at 23.911 percent P2O5, while estimates for the D-Tree property have yet to be measured.

 

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

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