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Potash requires moderate approach to pricing – analyst

28th February 2014

By: Mariaan Webb

Creamer Media Senior Deputy Editor Online

  

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Potash producers will have to follow a moderate approach to pricing and could risk choking off demand for the key crop ingredient if they set their sights too quickly on regaining a price level of $400/t to $500/t, says London-based analyst Paul Burnside, of CRU.

The price of potash has been on a downward trend since 2012 and the 2013 demise of the Belarusian Potash Company (BPC), which was triggered by Russian producer Uralkali’s decision to focus on ramping up volumes rather than protecting margins, has accele- rated the price drop.

According to data from Canadian producer PotashCorp, potash prices, as measured by the Vancouver export market, have fallen to about $300/t for the first time since 2008.

Despite PotashCorp cutting back on its production capacity, in response to the uncertainty created by the BPC breakup and a weaker market in general, Burnside says the group will still be able to meet demand over the next few years.

“The problem for the potash industry is that capacity growth has greatly exceeded demand growth over the last five years – and more capacity additions are on the way.”

He does not believe that potash demand is sufficient to support maximum operating rates and adds that such a move by major players could force cost-driven pricing. “This isn’t in the industry’s interest, so I think a more pragmatic approach will win out.”

Analysts are expecting a contract price to be settled with China at around $300/t, which could be a floor for the potash price. During the food crisis of 2007/8, potash had fetched nearly $1 000/t.

“Once a price floor has been established, the question will be how much this does to stimulate demand. A period of strong demand growth is needed to keep pace with capacity additions and this will require a moderate approach to pricing,” Burnside cautions.

The Russian-Belarussian cartel breakup, which led to Belarus detaining Uralkali CEO Vladislav Baumgertner in August, has captivated the industry in 2013.

Commentators have predicted that the former partners will eventually resume their trading partnership, although Belarusian President Alexander Lukashenko has said his country will only repair ties with the Russian miner if Uralkali gets new owners. As a precondition for freeing Baumgertner from house arrest in Belarus’ capital Minsk, he demanded that Suleman Kerimov sell his stake Uralkali. Russian tycoon Mikhail Prokhorov has since acquired 21.75% in Uralkali from Kerimov. Russia’s ambassador to Belarus, Alexander Surikov, has also reportedly said that Uralkali will restore its cooperation with BPC.

Burnside comments that the tone has been more conciliatory since Prokhorov replaced Kerimov, and says he believes all parties are keen to stop potash prices falling much further.

In North America, PotashCorp has curbed supply by suspending production at one of its two Lanigan mills and reducing output at its Cory facility, in Saskatchewan. It will also cease production at its Penobsquis facility, in New Brunswick by the end of the first quarter this year, which will allow it to accelerate development at its Picadilly mine.

The company expects to supply 10-million tonnes this year, which CEO Bill Doyle says should provide an “ample supply cushion”.

Curbing potash supply means that the firm had to cut 570 jobs in Canada, 440 of which are in Saskatchewan. The Canadian province is likely to feel the aftereffect of the BPC breakup into 2014 and 2015, with sharply lower potash activity forecast for the next two years.

Up to mid-2013, Saskatchewan’s potash production had been rising roughly 13% following a number of purchase agreements with various overseas customers in late 2012 and early 2013; however, when Uralkali announced its intention to move from a ‘price-over-volume’ strategy to an approach whereby it seeks greater volumes, it had placed a question mark over the outlook for the province’s economy.

RBC has lowered its 2014 real gross domestic product (GDP) growth forecast for the province to 2.1% from its previously lowered forecast of 2.7% and expects the growth to be maintained at 2.5% in 2015.

“The real wildcard in the outlook for the province is what will happen to both potash production and capital spending within this sector,” RBC senior VP and chief economist Craig Wright said in the RBC ‘Economics Provincial Outlook’ report published in December.

Despite the uncertainty lingering in the potash industry, global mining giant BHP Billiton is taking a long-term view and has confirmed its gradual push into potash.

In August, the Anglo-Australian firm, which unsuccessfully sought to buy PotashCorp in 2010, approved $2.6-billion worth of spending on its Jansen potash project, in Saskatchewan, with yearly spend to average at about $800-million.

The project is being designed to produce about eight-million tonnes a year of agricultural-grade potash and has an estimated 70-year life-of-mine.

At the group’s annual general meeting in Perth, Australia, in November, CEO Andrew Mackenzie remained upbeat about the long-term outlook for potash, which could eventually become a fifth core pillar of the diversified mining group’s business, along with coal, copper, iron-ore and petroleum.

Driven by a rising global population and greater economic prosperity, BHP Billiton expects demand for the crop nutrient to grow by 2% to 3% a year, until 2030.

Potash producer Mosaic says farmers will have to grow as much food over the next 50 years as they have over the full course of recorded human history and this will have to be done on roughly the same amount of land that is being farmed today.

Based on long-term population and GDP forecasts, grain and oilseed demand is projected to increase from 2.74-billion tonnes in 2011/12 to 3.09-billion tonnes in 2020/21 and to 4.43-billion tonnes in 2050/51. The 350-million-tonne increase required by the end of this decade, is roughly equal to the combined harvests of Argentina, Brazil and Canada in 2012.

Edited by Creamer Media Reporter

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