The Potash Market: a New Philosophy
The potash market is cyclical. It is subject to the same trends as all commodity markets. Demand for potash and, accordingly, export sales are directly dependent on the general global economic situation and, of course, on the particular situation in importing countries. For this reason, the past few years for the global fertilizer market have been very difficult.
BPC takes the reins
In the first half of 2016, when the market practically ‘froze’ its contracts with the world’s leading importers, BPC (Belarusian Potash Company) stepped up to lead in the negotiations with China and India.
Over the course of 2016, the situation in the potassium chloride market has become more complicated. In the first half of the year, prices on potash fertilizers fell and negotiations on new contracts with China and India were limited. Analysts forecasted that the potash market would not be able to stabilize if a landmark agreement for the industry were not signed.
Traditionally, China, as the world’s largest importer of potassium chloride (the country consumes 14-15 million tons of potassium chloride per year: 25% of the world’s market volume; half of its consumption is imported), concludes the first contracts and India – the second largest market for contracts – pays a bonus to China’s price. However, in 2016, contract negotiations with China were delayed due to a considerable accumulation of imported stocks and the hope of receiving a price reduction.
As a result, in 2016 BPC signed a contract with Indian Potash Limited (IPL) earlier than with China. According to the contract signed on June 27th, BPC will supply India with 700 thousand tons of potassium chloride in 2016 – 2017 at a price of $227 per ton. Currently, the price per ton of potassium chloride in Brazil – a spot market – amounts to $210, and typically long-term contracts are discounted compared to the spot.
BPC CEO Elena Kudryavets remarked that the interests of producers, importers, and end users of potash fertilizers – Indian farmers who make substantial contributions to the development of world agriculture – are reflected by the signing the BPC contract .
Many experts have pointed out that the price of the Indian contract is in line with market expectations considering that the potash prices within the last year were under severe pressure. Several experts stressed that the deal’s total, which will set the price target for the potash industry, was better than expected before the end of the year. “Taking into account the levels of the spot market, I think this price – it’s a good achievement,” Kevin White from VTB Capital expressed.
Two weeks later, on July 14, 2016, BPC signed a contract with China to supply 1.3 million tons at the price per ton of $219. It should be noted that during negotiations, China insisted on $180. BPC emphasized that the price of $219 per ton fixed in the deal with China is a success because the market situation and forecasts by analysts were more pessimistic. “The contract is positive news for the potash sector,” the Financial Times wrote on July 14th.
Many experts pointed out that the agreements with India and China have become the market’s salvation, and even more so considering that the prices were higher than expected. Just a week before signing the deal with China, Credite Suisse predicted that the contract would be signed at the price of “no more than” $210 per ton. “Right now, pointing to the international pressure on prices, we believe that the price of any contract which is signed in 2016 will not exceed $210 per ton,” Credit Suisse stated. “The more manufacturers delaying contract signing, the more amplified voltage on key regional markets; this, in its turn, allows China to change the course of the negotiations to their side,” the bank said.
BPC (JSC Belarusian Potash Company) was established by Belarusian authorities in September 2013 following Uralkali’s July 2013 withdrawal from exporting with Belaruskali. The JSC Belarusian Potash Company announced a new strategy for working in the potash market: producing volume above the price, which shocked the market and led to a fall in prices for potassium chloride by about a third.
For new players, winning their share of the potash market is quite a challenge. Yet BPC managed to establish itself rather quickly (including through state support) as a professional player . The main aim of the company after its ‘divorce’ with Uralkali is to ‘not harm the market’ and therefore adopt a flexible strategy based on a reasonable balance of price and volume, relying primarily on the effectiveness of sales. At the end of 2014, JSC BPC increased its fertilizers exports by 66% in comparison to 2013, reaching 9.5 million tons (in bulk).
It is known that the major price benchmark for the potash market has always been contracts with China and India. In 2015, JSC BPC was the first among the world’s players to sign a contract with China, which traditionally determines the pricing policy on most export markets – including spot – at the price of $315 per ton. Thus, last year, JSC BPC was the first company since 2011 to reach an agreement on a price increase compared to the last year’s contract (+ $10 per ton).
In 2015 exports of Belarusian potash fertilizers amounted to 9.2 million tons (in bulk). JSC BPC’s share in world exports increased from 18.8% in 2014 to 19.3% in 2015; a record result in the history of the Belarusian potash industry.
Difficulties in the market
The potash market has recently been under pressure as a result of macroeconomic conditions (dampened growth of GDP, the decline in oil and commodity prices which spurred devaluation of the national currencies of major grains and oilseeds producers, etc.) and in turn, the purchasing power of farmers has become significantly reduced.
The weather has also been and remains to be an important factor for the fertilizer market. The negative impact of natural disasters such as El Nino (variation in the temperature of the water’s surface in the equatorial part of the Pacific Ocean, which has a significant impact on the climate. – author’s note), which caused drought in Southeast Asia and led to reduced production and higher prices of palm oil. Likewise, the rainy season was delayed by more than two months in the Central American markets and similarly there was a severe drought in South Africa.
As a key player in the potash market, China has a serious impact on the fertilizer market. In 2016, the ’dead’ season of new purchases from China, limited demand from India and the prevalence of ’random’ deals on the spot market led to further price reductions for potash fertilizers in the first quarter, according to a report on the global fertilizer market development, prepared by Potash Corp for the annual conference of the International Fertilizer Industry Association (IFA), which was held in June 2016 in Moscow.
The degree of key players’ responsibility
The key players on the potash market are Belaruskali/ BPC, Canadian producers PotashCorp, Mosaic, and Agrium, the Israeli company ICL and the Jordanian APC, the German company K + S, and the Russian Uralkali. Each company builds strategic market behavior its own way. At the same time, each of the major players are assessed by experts who estimate the responsibility of their behavior in the market particularly on indicators such as changes in production and export volumes in difficult market situations and on the eve of major contracts with India and China, requiring a supply of goods reduction.
During this period it is important for all potash producers to balance the market and to avoid adding extra pressure. This year, the main players in the market, Belaruskali, Uralkali, and Canadian producers, reduced overall production volumes. At the same time, with the intention of showing the utmost care to the market, Belaruskali further reduced production to a greater extent than all the manufacturers in Canpotex combined (Trader Canada’s Potash Corp., Mosaic and Agrium, US) and two times more than Uralkali. More specifically, production volumes at Belaruskali decreased by 1,219 million tons (minus 22.1% compared to the same period of 2015), whileUralkadiya – to 596 thousand tons (minus 10.5%) in the first half of 2016.
The market recovers
Experts forecast that signing contracts with the leading importers, China and India, would help restore the potash market in fact materialized. “The situation of the market has become more stable and easier to understand since the existence of agreements to supply large volumes of potassium chloride makes pricing more transparent. Manufacturers agree that as a result of interest in the product from buyers, in the second half of the year it is expected to grow significantly,” Argus wrote in the potash fertilizers market review from 4 August.
As PotashCorp stressed in its report on the financial results from the second quarter, the announcement about the contractual agreements between potash exporters and importers in China and India has reduced pressure on world spot markets and helped suppliers in their efforts to achieve higher spot sales prices.
In fact, price increases have been noted in Brazil, the country that in a way acts as a driving force that stimulates positive price dynamics in other regions. Experts point out that the price of potassium chloride increased for three consecutive weeks in Brazil. The product’s value has already reached $225-235 per ton. Suppliers are aiming for prices in Brazil to reach $230-240 per ton and there is reason to believe that achieving such prices in the coming weeks is possible.
Favorable signs have appeared for suppliers in the market. The price of potassium chloride is increasing in Brazil, the US, Asia, and Europe. Supply and demand in the global potash fertilizers market become has become more balanced. Signs point to rising prices throughout the world and higher activity of customers.
Prospects for the potash market
According to IFA data, growth in the potash market is expected in the long-term perspective at an average of 2.5% per year. Experts note that in global agriculture there is a problem of insufficient potash application to the soil,or in other words, the potash market has potential. The PotashCorp expects that the potash fertilizers market will recover in the second half of 2016 in terms of prices and shipments volume. Experts forecast an increase in most major regions of consumption.
The Canadian company PotashCorp estimates the global demand for potash fertilizers as follows: “With the improvement in customers’ attitudes and the closures within the industry we expect the industry will establish more favorable conditions before the end of the year. Importantly, we see the potential for record demand in 2017 with a 61-64 million tons range of annual deliveries in, as good access encourages farmers to add nutrients to the soil, – the CEO of PotashCorp Johan Tealc notes. “We believe that the world will grow by about 2% -2.5% per year, which gives us an approximate consumption of 70 million tons in 2020. This growth is not uniform, we know it. There is volatility, based on macroeconomic factors on the ups and downs.”
There are new players in the market
Previously,in the global potash market for various reasons, an average of 5 million tons have put out of operation for a period of ten years. Meanwhile in the coming years, three fields will be closed due to their depletion, two productions are being reoriented from potassium chloride to specialized fertilizers production, and another two mines will be closed in order to limit the supply.
In 2016, some manufacturers have already shut down high potash production. In particular, in January 2016 the Canadian company PotashCorp decided to indefinitely halt production of 1.8 million tons per year within the Piccadilly project that was launched in 2015. The Mosaic Company stopped production at its Colonsay mine and cut 330 workers. The American manufacturer Intrepid went in a similar direction: unable to compete with Canadian and other manufacturers, the company is forced to shut down potash production.
But in any case, the market tendencies are that potash reserves in the process of development are gradually depleted, and in their place the development of new fields begins. To a certain extent this is a natural process that ensures balance in the market.
At the same time, in the coming years the global potash market anticipates new facilities to commission the production fertilizers, which will lead to a serious intensification of competition. It is expected that the Legacy project (Canada) by German producer K + S will be launched at the end of 2016 – early 2017, with a potential capacity of 4 million tons per year. In the years 2017- 2018, the EuroChem project is planned to launch with a total of 3.3 million tons of production capacity by 2020. In addition, by 2017 Canadian producers could add about 4 million tons.
It is expected that in the near future, BPC’s resource base will significantly increase. At present, Belaruskali’s operational capacity has reached 12.6 million tons per year, making it one of the largest potash producers in the world. In August 2014 Belaruskali started the construction of the Petrikov Ore Mining and Processing Industrial Complex which has a capacity of at least 1.5 million tons. The first phase of the project’s completion is scheduled for 2019 and full implementation in 2021 (according to the plans, the Ore Mining and Processing Industrial Complex should begin operations before January 1, 2022). The new Ore Mining and Processing Industrial Complex of a private company, Slavkaly, of the Luban district in the Minsk region is planned to be commissioned with a capacity ranging from 1.1 to 2 million tons in early 2020 (products exported by the company, presumably, until 2019, will be handled by BPC).
Let’s not forget that Belarus is helping to build Garlyk Ore Mining and Processing Industrial Complex in the Lebap province of northeastern Turkmenistan. The project is promised to begin in March 2017. It is expected that the Ore Mining and Processing Industrial Complex will produce an annual 0.6 million tons of granular and 0.8 million tons of fine potassium chloride.
Experts point out that in the context of growing competition within the potash market, competitive factors for fertilizer producers will be items such as raw material and energy costs, the logistics of fertilizer delivery to major customers and shipping ports and the effectiveness of transhipment facilities.
Is a new potash alliance necessary now?
Recently, the media started talking about the reestablishment of a Belarusian-Russian potash alliance with BPC. Experts, however, remain skeptical. “A new potash alliance is unnecessary for both the companies themselves as well as market: in the next few years there will be new capacity which will outpace the demand for growth, so cartel actions cannot support prices as it was 3 years ago,” Raiffeisenbank analyst Constantine Yuminov notes. “In our opinion, the alliance will not bring any strategic advantage to either party under the current market conditions. With the emergence of major new potash projects on the market, the situation of significant excess of supply over demand continues, and therefore the oligopolistic market nature will not return,” the analyst emphasizes.
In Scotiabank’s commentary, analyst Ben Aysokson noted that, “Belarus has almost nothing to gain from the potential BPC 2.0. Here’s why: firstly, Belaruskali is already more disciplined than Uralkali – the proof is the reduction of production and exports in the last year as well as readiness to export at the level of 7.5 million tons this year compared with the normal level of 9-10 million tons. Secondly, Belaruskali has reached a significant market share and maintained customer relationships in key markets, therefore no longer needing Uralkali’s ‘professional management’ of the market.
According to some experts, the philosophy of the potash market has been radically changed: it has begun to take into account the real market mechanisms based on fair competition. This enables buyers and suppliers through a constructive dialogue to work in a balanced manner and conduct business within the natural market rules.
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