Fertilizer International 494 Jan-Feb 2020
31 January 2020
Seeds of doubt
POTASH MARKET REPORT
Seeds of doubt
Andy Hemphill, senior editor for potash at ICIS Fertilizers, takes a deep dive into the potash market. Potash producers are praying that tight capacity control and resurgent demand will curb the current bearish price trend.
After a rocky second-half in 2019, the global potash industry has limped into 2020 hoping that tighter production control – and the potential for resurgent demand – could spur trade and even, perhaps, a price recovery.
Last year ended with the major global producers publicly announcing cuts to muriate of potash (MOP) output – their tried and trusted response to what is traditionally a slower period of demand.
But did they act fast enough to curb production in 2019? Probably not, given the already high inventory levels in Brazil, a key importing nation – a situation compounded by the waiting game being played by Chinese buyers over their next long-term import contract.
Production cutbacks
Last September, Canadian major Nutrien unveiled plans for inventory shutdowns of up to two months at its Allan, Lanigan and Vanscoy potash mines in Saskatchewan. A two-week shutdown at Nutrien’s flagship Rocanville mine in the province was also announced subsequently, despite a Canadian Rail strike that caused chaos in mid-November.
On the other side of the Atlantic, German potash producer K+S responded similarly to weak demand by cutting back its
2019 production by up to 300,000 tonnes. This curtailment in MOP output is expected to reduce company earnings (EBITDA) by up to e80 million, according to K+S.
Russian potash producer Uralkali also announced plans to cut production in September. The company planned to reduce its MOP output by 350,000-500,000 tonnes for the remainder of 2019 by temporarily shutting down its production complex for maintenance. Although BPC was more reserved about precise tonnages, the Belarusian producer also confirmed its production would be cut by “around one-third” during 2019’s last quarter.
Despite arguably acting too late, the main potash players nonetheless appear confident that, collectively, their combined production cutbacks will support the potash market by tightening availability.
Neither are they ruling out a possible rise in potash prices, provided production discipline continues.
“A lot will depend on the levels of production and demand. I’m not… dropping the scenario of a price increase. If the industry will be wise enough to avoid overproduction, prices can go up dramatically fast,” a chief salesperson of one major producer told ICIS.
Of course, a lot of this confidence hinges on the potential for increased fertilizer demand in the first-half of 2020. Exactly when buyers will return to the market is also up for debate.
Long-term potash supplies
The start of negotiations for the next longterm Chinese import contract will be a particularly notable market feature in early 2020. Chinese buyers are expected to approach MOP suppliers in January or February 2020 to begin talks, having opted to stall these in late 2019.
Chinese MOP inventories remain high. Buyers also have flexibility on source of supply – with the choice of domestic production and/or lower-priced imports from Cambodia and Laos – giving them considerable clout in negotiations.
The delay to the Chinese contract forced Indian buyers to settle their own import contract first. India is eventually expected to buy 1.8 million tonnes of MOP between October 2019 and March 2020, the subcontinent’s newly-established six-month import period. Overall, India’s 20192020 purchases are expected to reach 3.8-4.0 million tonnes in total.
At the time of writing, there have been no new Indian contract settlements since early November, when the Arab Potash Company (APC) became the latest producer to sign a supply contract with Indian Potash Limited (IPL). APC did not, however, reveal contract details – either the price agreed or the volumes placed – beyond saying its agreement with IPL was in line with the market level.
The first wave of 2019-2020 supply contracts (Table 1) were agreed in October and early November at $280/t cfr (cost & freight) India – a decrease of $10/t from the previous contract supply period.
Indian long-term contracts are a bell wether for the global MOP trade. Given that a decrease of up to $30/t on the previous year’s contract price has been heard in discussions, the initial decrease of just $10/t was seen as the first sign of a recovery in MOP demand and pricing – after months of bearish sentiment and eroding offer levels.
But it later became clear, that IPL’s decision to limit settlements to a six-month period means a stronger argument for a higher price cut will be advanced in the first-quarter of 2020.
“The discount wasn’t really enough, but the Indians had to get things moving. In the first quarter, the Chinese can push everybody down, looking for $20-30/t less – but that’s a problem for then,” a source at one MOP producer told ICIS: “For now, the pain is gone. The potash industry will survive. We’ll see more demand in Southeast Asia as [crude palm oil] futures are recovering, then there’s India. First-quarter and maybe second-half [2020] will be busier.”
Mergers and management
Another key point to watch in 2020 is the potential for consolidation in the global potash industry.
Uralkali has been getting close to another major player in the Russian market – EuroChem. The pair have been discussing the possibility of “logistics optimisation for shipments into selected southeast Asian markets”, a Uralkali source told ICIS.
Although some coordination has been mooted, this is the first overt signal of a potential Uralkali-EuroChem alliance. Euro-Chem is a relative newcomer to the potash market. It also manufactures a variety of fertilizer products, including urea, ammonium nitrate and urea ammonium nitrate. The company plans to leverage its already trusted EuroChem brand to secure a premium on MOP sales in Brazil.
The potential EuroChem-Uralkali team-up remains possible. This is despite news in January that a joint bid by Uralkali and Ural-chem – the major Russian nitrogen producer – to take a controlling stake in Brazil’s Fertilizantes Heringer had fallen through. Heringer is currently under bankruptcy protection. It is understood that OCP and Nutrien – who own a 10 percent and 9.5 percent share in Heringer, respectively – have the right of first refusal for the company.
In Canada, meanwhile, questions surround potash major Nutrien’s plans for 2020 – following a dismal year in which the US market was characterised by bad weather, low crop prices, and limited demand. Nutrien’s CEO Chuck Magro nevertheless remains bullish in the company’s latest results announcement: “We believe that agriculture fundamentals are starting to strengthen, and we expect 2020 to be a strong year for crop input demand.”
Farmers in many US states have been discussing the need to tighten expenditure since the end of last summer. A large percentage have been storing the fertilizer and crop production products that went unused in 2019 ready for the start of 2020’s spring planting season. This could see the US fertilizer retail market suffer a final blowback in early 2020 from last year’s historically poor planting season.
A Texas farmer told ICIS “it’s getting harder out here”, confirming he was holding off from any further fertilizer commitments until the start of spring.
“Crop prices have been not good for a while now, and everything we are buying to put into this, from seed to fertilizer to labour, is costing so much more, and there is less coming in,” the Texan farmer said, adding: “I had hoped to take on more land but not now, and not without having more equipment, and because I don’t have faith prices will not crash again.”
One thing everyone seems to agree on is that a significant upturn in upcoming 2020 corn sowings will help spur a recovery in the US fertilizer market – a development that is generally expected if the weather stays favourable.
SOP outlook
The 2020 outlook for sulphate of potash (SOP) – MOP’s low-chloride, premium sister product – is less bearish, albeit still weak overall.
European SOP demand was steady in second-half of 2019, with bids declining slightly in what is the low season. Supply is ample going into 2020, meaning there is little expectation of increased demand until this year’s second-quarter.
Although imports are on the increase, Chinese SOP has yet to make large inroads into the traditionally insular European market. There is speculation, however, that Chinese-sourced SOP may find a more receptive audience in Europe, if imports continue to rise at the rate seen in 2019.
It seems very unlikely Beijing will impose SOP export tariffs in 2020, following the increase in volumes traded internationally last year (Table 2), generally regarded as a great success. That said, high freight costs, and the expense of enrolling and complying with the EU’s REACH regulations, may deter many potential Chinese SOP producers from exporting to Europe.
In Australia, meanwhile, five junior mining companies are locked in a race and competing to be first in the market to produce SOP from Western Australia’s dry lakebeds. None of the five has yet to begin producing SOP in bulk, and all are still at relatively early stages of development – although two companies have a noticeable lead.
Salt Lake Potash has secured a trio of offtake agreements for its low-chloride SOP fertilizer amounting to 170,000 t/a. Similarly, rival prospective producer Kalium Lakes has also secured buy-in from established market players (Table 3).
