Potash prices build on 2020 momentum

Author Argus

The potash market has seen significant price gains across almost all regions in the last few weeks, and market participants expect prices to continue to rise throughout 2021.

Midpoint prices have jumped by nearly $14-18/t since the end of last year in southeast Asia, Brazil, and the US. So what has driven the recent price increases, and will the same drivers continue to push prices up? David Riley, lead potash analyst, Hasan Tarique, senior consultant on potash, and Ewan Thomson, global potash editor, discuss.

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Ewan: Hello, everyone. And thank you for joining us today for another potash podcast from Argus, the leading provider of energy and commodity price benchmarks. Today, we're looking at potash prices, their drivers, and what we think the future looks like. My name is Ewan Thomson. I'm the global potash editor and I'm very glad to be joined by Hasan Tarique, senior consultant on potash, and David Riley, our lead potash analyst. Guys, thank you so much for joining us today.

Hasan: Thanks, Ewan. Pleasure to be here.

David: Thank you for inviting me, Ewan.

Ewan: We wanted to take the time today to very briefly look at the recent price increases in the potash sector. We will also discuss the short-term outlook. And we'll look at crop fundamentals, how potash compares with other unconnected commodities, and then discuss our medium-term forecast. So, let's dive straight in and look at recent price developments.

It's hard to pick one particular moment when regional MOP prices started to move as one, but there appears to be a more cohesive global rise in the last few weeks. Looking back to last year, out of the main spot-buying regions of Brazil, the U.S., Southeast Asia, and Europe, it was Brazil that started to see prices rise steadily. Brazilian granular MOP prices were at a midpoint of $215 per ton CFR in April last year. After which, prices started to rise steadily. But the rise was happening at the same time as U.S. and Southeast Asia prices were still falling. Brazilian prices started to rise from April, and it took the U.S. market a further five months before prices started to rise. Southeast Asia prices took six months to show any signs of growth. And Europe has still yet to see any increase in its prices in Euros some nine months after Brazil changed direction. Although if you convert the price in Euros into U.S. dollars, the story is quite different, and it's actually risen steadily by around $22 a ton since April 2020 till now. But in any case, the markets were not all moving in the same direction.

Market participants said, the Brazilian granular MOP price in April was way too low anyway, and it had to come up in order to be more closely aligned with the rest of the granular MOP prices from around the world. And the general consensus was not that Brazil prices would drag up the rest of the world, rather that Brazil needed to come up regardless. So, it was only really when the U.S. market in September started to show price increases almost every week for over three months that the market began to see concrete evidence of an end to flat or falling prices. And the strong recovery in the U.S. was, I think, the catalyst for rising prices across the rest of the world.

No region exists in isolation, but for much of last year and even the latter part of 2019, there was a sense in the market that regions had fragmented and prices were more at the mercy of local influences as opposed to the general global trends. This was perhaps magnified as COVID-19 affected different countries in different ways. For example, in Malaysia, COVID-19 directly led to a number of issues of crude palm oil plantations, which in turn cut demand for MOP. Whereas in Europe, the effect on MOP demand was virtually zero over the course of 2020.

So, it's been an interesting recovery in prices, all happening at different times and for different reasons. But as of late January, the market does show some signs of a global upturn. And it is our opinion that prices will collectively continue to rise even in Europe where prices are on the brink of an increase once seasonal demand returns. But why? Why are prices going up?

Well, I think we can certainly look at producer discipline as a major driver for price increases. We all know that production capacity in the potash industry far outweighs demand, but producers look to balance supply and demand with varying degrees of success. It remains a question mark as to whether the announced production cuts in late 2019 were enough to balance the market. But as of today, we have a perfect cocktail of factors conducive to price increases. Supply is tight, Canpotex said it's fully committed across the globe until the end of the first quarter. And we have heard of tight supply in other regions, too. So, press releases aside, we do see buyers struggling to get spot volumes for prompt loading.

We also see demand rising, strong crop fundamentals, and crop prices that are favorable to farmers, which combined with tight supply and rising prices in other fertilizer markets, is the ideal moment for producers to lift prices. And this particular set of circumstances should easily stretch out till at least the end of this quarter and perhaps beyond.

So, as we look forward, a few known unknown, shall we say, are on the horizon. We have ongoing political instability in Belarus which could have a number of effects. COVID-19, of course, and the continued ramp-ups of new entrant, EuroChem. And that ties in to some extent with producer discipline. I've probably been talking long enough. I'm sure David and Hasan are keen to share some of their views. So, to start with you, Hasan, commodity prices are rising generally. Ag prices have shot up. So, what are you seeing in terms of the ag fundamentals?

Hasan: Thanks, Ewan. So, yes, like you pointed out, commodity prices in general are rising. And in terms of crop prices, we've seen a significant rally over the past few months. And, you know, when you compare to the lows of early mid-2020, corn and soybean prices have shot up by over 70pc. And you mentioned Malaysia earlier. Crude palm oil prices are doing quite well as well and so are canola prices in Canada. So, in general, we're seeing strong demand for grains and oil seeds, and prices are rising as a result. But at the same time, what we're also seeing is a rise in production and crop acreages going into 2021. So, for grains and oil seeds, again, we're seeing a rise in crop acres in the United States, in Brazil, in China, in India, all the major agricultural countries. And the same story is true for oil seeds.

And just to give you a flavor of what's happening in terms of crop production in China, when you look at Chinese soy production, in 2020, Chinese soy production was up almost 4pc year on year. And that followed a 0.9pc rise in 2019. And when we look at crop acreages for soybean or planted acres of soybeans in China, we saw a 6pc increase year on year in 2020. This was preceded by an almost 11pc increase in 2019. And Chinese yields are rising significantly as well. So, soybean yield increases were 2.3pc in 2020. So, I'm giving you a lot of stats here, but these stats all point to one thing: that Chinese soy production is rising. And it's being facilitated by not only increased acres, but an increase in yields, which is, you know, tied to fertilizer consumption in China. For soybeans, that means potash.

Now, just taking a look at Brazil, Brazil's soy exports have been on the rise. So, this year, we expect Brazil to reach a record soybean production and record exports. And this is, again, facilitated by a rise in acreages in soy. And the Brazilian real has been weak and depreciating, and we expect that weakness to continue over the next year and beyond, which puts Brazil in a pretty competitive position when it comes to soy exports.

You know, just quickly going back to CPO, CPO futures are looking good. Prices have been on the rise. There are some headwinds in terms of, you know, downstream consumption of CPO with the EU and the U.S., putting some restrictions on crude palm oil consumption in food processing. But when we look at the USDA numbers, we still see a production increase by around 3pc in Southeast Asia. Again, these are the strong fundamentals that are supportive for MOP consumption in Southeast Asia.

And now, let's take a quick look at the U.S. You know, we've had pretty strong demand going into fall application and inventories being built up for spring application over the past few months. And we've seen, you know, Corn Belt and NOLA prices shoot up as a result. You know, in 2019, we had a pretty bad year in terms of weather. And then that sort of bearish year followed through into 2020. But over that period, we saw inventories being drawn down in the United States. And then in time for fall application and inventory for spring application, we saw a dearth of MOP inventories in the United States.

And we had reduced availability or prompt delivery. And that resulted in prices rising in the U.S. And then we've seen that price rally continue on into last quarter of 2020 and into January of 2021. So, again, this is all being driven by crop fundamentals. Corn is doing quite well in the United States. Corn prices are, you know, upwards of $5 a bushel. Soy prices in Chicago are, you know, close to $14 a bushel. You know, not very long ago, these prices were around the $3 mark for corn and $9 mark for soybeans. We've had some strong growth in crop prices in the United States. And prices, acreages, you know, low inventories, all of these are pretty strong indicators of demand for MOP. And again, to finish off, we're seeing strong offtake of grains and oil seeds with governments ensuring food availability and trying to keep food inflation in check. And stocks-to-use ratios are going down across crop commodities.

Before I end, just a quick note on weather. We've seen pretty supportive weather conditions in the United States, strong monsoons in India for the past couple of seasons. And the La Niña is supportive for potash demand in the Corn Belt with some good moisture and also in Southeast Asia. So, you know, again, adding this weather factor along with the increased crop acreages and strong crop prices, we're seeing a pretty solid ag picture and farmer profitability being strong going into 2021. But demand is only one side of the coin. David will share some of the supply side details in potash that should give us a better view of the overall market balance and how prices will get affected by, you know, supplier decisions.

David: Thanks, Hasan. So, on the supply side, because we're forecasting demand to grow consistently around 2pc per year in the medium term, we're entering a period now of consistent capacity growth and capacity growth outpacing demand growth. There are a couple of smaller expansions that were pushed back by COVID-19, the likes of part of ICL's consolidation works to their site in Spain or APC's minor additions at the Dead Sea. And they're expected to come in in the next couple of years. Equally, K+S will continue to ramp up at their Canadian Bethune Mine. And Mosaic will see capacity gains and cost reductions from its Esterhazy plant works, where they're transferring operations to their new K3 shaft.

But the number one producer to watch in this window is EuroChem. It is producing wholly from its Usolskiy plant with capacity around 2.3 million tons a year at present. And over this period, we expect continued ramp-up of that mine and potentially the start of second phase development, leading towards the capacity at that site of the order of 3.7 million tons. And then EuroChem has a second asset, VolgaKaliy. Now, we haven't seen any commercial production from the site so far. And we expect it to remain very low this year. But we do expect that EuroChem will begin ramping this up in the next few years.

And the key thing to watch with EuroChem is their strategy. When they first entered the market, they were quite aggressive in pursuing market share. And that created some very competitive markets, particularly in Brazil. With temperance to their ramp-up suggested by the approach they're taking at VolgaKaliy, they may align more closely with other suppliers and value price over market share, which would then provide support to medium-term prices. And that really is the key of medium-term outlook. The market will remain oversupplied and rely on producers being disciplined to support prices.

And one of the main producers, indeed the largest producer in 2019, Belaruskali, has in the past broken away from this strategy that is used by all its peers. And interestingly, in 2021, we're expecting to see commissioning for Belaruskali's Petrikov mine, which will gradually ramp up to 1.5 million ton a year capacity. So, commercial volumes produced there will be low this year, but production increases out of Belarus dampened some of the potential price rises. It just depends on how aggressively they pursue Petrikov and any subsequent expansions.

So, Belarus is a major consideration in our medium-term outlook. But it potentially creates an even greater in our short-term forecasting. In many ways, it's the largest of the known unknowns. The geopolitical situation there shows no sign of resolution. There was strike disruption in August that impacted production for a few weeks. And we've seen announcements from Yara, who are a major buyer from Belarus via exporter BPC, warning that they may take action if the situation on the ground doesn't change due to reports of Belaruskali firing workers who exercised their right to strike.

The interesting thing, though, is looking at export figures via Klaipeda in Lithuania. Beyond the couple of week strike that we saw in August, which was represented by a drop in export volume, we've seen very little evidence that the social disruption is causing production disruption. Obviously, if sanctions were implemented, we could see buyers with BPC contracts looking elsewhere. And that would tighten the market very quickly and cause a fast rise in prices. But at present, we don't expect these sanctions to be brought in.

Ewan: Very interesting. Thank you both. We'll be covering these topics in more depth, obviously, in our potash market services. You can find more information on www.argusmedia.com. But for now, all that's left is for me to say thank you very much to Hasan and David for joining us today.

Hasan: Very welcome, Ewan.

David: It was a pleasure, Ewan.

Ewan: And we hope you will join us again for our next potash podcast in the near future.

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