Inside Fertilizer Analytics: Potash, Jun. 2021

Author Argus

The potash market is facing several key issues with significant potential to impact the sector, including possible EU and US sanctions on Belarus, rising spot market prices, producer output/inventories and new capacity – particularly BHP possibly partnering with Nutrien on the Jansen project.

Join David Riley - Lead Potash Analyst, Ewan Thomson - Editor, Potash, and Tim Cheyne - VP, Fertilizers as they begin with a discussion of possible European and US sanctions on Belarus and the potential impact on the Belarussian potash industry - particularly export routes, production output and investment levels. We also discuss the potential impact of sanctions more broadly on other producers, trade flows and global potash prices. We then pivot to contract agreements between China and India, with the possibility of another round of contracts in 4Q 2021. We assess what's been driving the recent surge in spot market activity and rising spot market prices, and how long we expect that to continue. We then review increasing producer output last year, how that's fed into 2021 and whether we expect to see that continue. That leads us to a discussion on producer inventory drawdown, the lack of new potash capacity this year and how that influences the medium term outlook. We finish with a longer term view of projects, particularly those that could be accelerated by the current price environment. We review BHP potentially partnering with Nutrien on the Jansen project and how that would influence our outlook for the project.

 

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Transcript

Tim: Welcome to the Argus Media Inside Fertilizer Analytics podcast, the latest episode. So we know that commodity markets are rallying, and certainly, fertilizer markets are no exception. Today we'll be discussing the potash market where prices have continued to increase even this week but certainly in the last few weeks and since the last time we discussed potash on this podcast a quarter ago. Lots to discuss on pricing. But also, there's some potential disruption in political events that could be happening related to sanctions to discuss too. So it's gonna be a very full agenda. So let's get straight into it. First, introductions. I am Tim Cheyne, VP of fertilizers here at Argus. And today, I'm very glad to be joined by Ewan Thomson who's the editor of our Potash Market Report, and runs our potash desk. And David Riley is our lead potash analyst in our consulting team. So welcome to you both. Are you ready for some lively potash discussions?

Ewan: Always, Tim. Thanks for having me.

David: Yeah, excited to get into it, Tim.

Tim: Great. I'm glad to have you both on because it's always great to have a combination of the current market situation and some forward-looking assessments that each of you are doing in your own areas. So let's start with, I think, the biggest issue in the potash market currently. There's been rumblings of possible sanctions on Belarus from the EU and the U.S. after the arrest of the journalist, Roman Protasevich. His flight was diverted from Vilnius to Minsk and him and his girlfriend were taken into custody. Belarus is one of the major exporters of potash to global markets. So what could the impact of this be on the Belarusian potash industry, Ewan?

Ewan: Yeah, start with the easy ones, Tim. There are a lot of options on the table at the moment and no firm decisions have been made yet. But given the comments from EU leaders, we're working on the assumption that there will be an escalation of current sanctions to include state-run companies. Now, Belaruskali is a state-run company, but the EU and the U.S. will have to consider the various impacts of sanctioning the single biggest potash producer in the world very carefully. The European Council and the U.S. State Department will continue to discuss details of the response. But until we see those details, it's very hard to pinpoint a single direction that this could take the potash market in. David and I have had a look at some possible outcomes. And it would seem likely that sanctioning Belaruskali would lead to production cuts, rerouting of its traditional roots, and a potential change in product mix. There's also the potential for exports from Belarus to move from the Port of Klaipėda in Lithuania where they currently export the majority of its potash from to Russian ports such as Ust-Luga, St. Petersburg or Primorsk. But the sheer volume of potash exports through those ports will make that challenging, not to mention the higher logistical costs and the distance that the alternative route would lead to. So the sanctions themselves will have complex geopolitical implications as well. And it's difficult to foresee all of the many outcomes of sanctioning Belaruskali. So it's not an easy decision for the EU or the U.S.

Tim: David, any thoughts on that? Do you think there'll be any implications for Belarus' target markets? Of course, they would be blocked out of EU and European markets. Where would the alternative markets be?

David: Yeah. So I think it's interesting if you look at where kind of Belaruskali exports, and exports through BPC at the moment. It does send a decent proportion of its total into the U.S. and into the EU as well. And those would be the markets that would obviously be affected by these sanctions. So the first target I think you'd have to look at would be Brazil because if it's locked out of the U.S. and the EU, those two granular markets, that is really the largest granular market remaining. That's somewhere where demand has been good this year. But how much of kind of BPC's access could be absorbed into Brazil would be interesting to see how much they would be rerouting that. And if they're not looking at Brazil alone, then the other area would be Asian markets. So we think the kind of Southeast Asian spot market has a lot of potential. There's also if you look into the contract markets a bit more, so BPC was the first to agree with both China and India on contracts this year. And China especially presents an opportunity where it could be mutually beneficial for BPC and China if BPC is looking to offload tons. China still has that $247 a ton CFR contract price, which is very low compared to prices elsewhere. So it's having to attract as many additional tons as it can. And if BPC is looking for somewhere to place additional volume, China might be a market that's very receptive to that.

Tim: Do you think that means that Belaruskali could maintain current production or planned production wouldn't be affected by these sanctions? Would it carry on with its current investment plans, or will those likely be affected?

David: So on the production side, it would probably cut back a little from, like, kind of 12 million ton a year level it's been operating at for the past couple of years because that's been quite a high operating rate for it. So we could just see some kind of extended maintenance outages maybe, but I wouldn't expect large production cuts from Belaruskali this year despite the sanctions. On the investment side, we are looking at their kind of Petrikov mine plant, which is due to come to market kinda later this year or early next year. And it will be interesting to see what approach they do take with that because they could continue the investment and in fact, ramp it up if the cost position at that mine is better than its over existing mines. Or we could see them potentially defer that project, which has already been delayed once from 2019 to now on its kind of estimated completion date. We could see that kicked a little bit further down the road. But I think in terms of the kind of earlier stage projects, the likes of the early investment they've got at Nezhinsky, that's something that we would see probably deferred a little bit more if their kind of cash flow was threatened by these sanctions.

Tim: Okay. Let's look at the impact on sanctions for other producers. Ewan, what do you think could be the impact more broadly for the potash market, especially on the suppliers when we see those tons from Belarus potentially aimed at Brazil and Southeast Asia and China, as you described?

Ewan: Yeah. So, I mean, if the EU, the U.S, and potentially some other countries such as Norway, Australia, and New Zealand, all stopped buying MOP from Belaruskali, then we will have a split basically between places where Belaruskali-distributed BPC can sell to and areas where it cannot sell, which will lead to a rapid reshaping of their distribution network. It will also lead to higher MOP prices in those countries that support sanctions. And potentially, BPC may have to dump large volumes in other countries, which could conceivably lead to a drop in prices or a slowing of price increases. So we could see a decoupling of global potash prices into two broad categories, sanctioning and non-sanctioning countries.

The EU and U.S. sanctions may have unintended consequences too. There's a risk that countries involved in sanctions will be at a disadvantage cost-wise to the rest of the global market, which needs to be considered. Food security around the world is obviously paramount. And it's a delicate period coming out of a global pandemic anyway. So sanctions must not disrupt food supply either because there needs to be enough potash in the market to supply global needs. Otherwise, potash will only be available at prohibitive prices to some countries as the supply shortfall leads to spikes in prices. That obviously presents opportunities of course for other producers though. And we think that the Canadian producers have the biggest advantage in this particular situation I think. Is that right, David? Mainly because of the extra idle capacity that they have.

David: Yeah. So it's the combination of the Canadian producers are already the only ones and especially Nutrien who have the kind of capacity that's not really being used at a high rate at the moment. And they're also the main suppliers to the U.S. market, which is where we think the sanctions would bite and we would see prices rise. So you'd have the Canadian producers K+S who's operating in Europe and also Canada would be well-placed. The other Russian producers may be able to benefit from sales into Europe at a higher rate. And on the flip side of the coin, really, it would kind of be the Middle Eastern producers who might be exposed to more risks from this because they send a large proportion of their tons into Asia. And if BPC is looking to offload and dump tons there, we might see some kind of suppressed prices in that region.

Tim: Yeah. So producers who could dial up production like Nutrien could benefit from a greater market access. So we certainly could see some reorganization of supplier relationships. I wanted to talk about one of the hot topics from the last podcast, turning to Asia. It was the contract agreements between China and India where you'd said that they'd been agreed at levels below-market prices, where you thought that could have been. And of course, market prices, spot prices, are now even higher. What's happened since? Can you give us an update on what the situation is now?

Ewan: Yeah. So very briefly, a lot of the excitement around contract prices has died down now. And the market's broadly moved on I would say. There were rumors of China changing the contract price of $247 a ton CFR to lift it to levels closer to India's amended contract price of $280 a ton of CFR. But we think it more likely the contracts have concluded for the current period. And China received lower volumes from suppliers than it needed because of the low price. So another round of contracts this year is on the cards probably in the fourth quarter. Spot markets and contract prices have little relation to each other right now as we've seen a rapid run, as you mentioned, Tim, on the spot prices so there's a bit of a disconnect now between the contract prices and the relative spot markets nearby.

Tim: Yeah. David, anything to add on the contracts negotiations? Do you agree with Ewan? Are we gonna probably see...are we gonna see those being renegotiated anytime soon?

David: Yeah. So our current forecast for it is, as Ewan said, the fourth quarter for China, especially. I mean, that's obviously a little bit dependent on what happens with BPC and whether there's kind of additional tonnage as agreed there. India, because it's renegotiated to that $280 a ton CFR price, that's got a bit more interest from suppliers, which might hold off the contract agreement there into early 2022. But otherwise, yeah, that's really when we expect the new round of contract prices to come in.

Tim: Ewan, you pointed to spot markets and how different they are currently to the contract levels. And really, there has been a lot of activity in the spot markets. What's been driving the recent surge, and do you think it will continue...will there be continued strength in this sort of out-of-season time of the year? What's behind? What's going on?

Ewan: Yeah, that's an interesting question. And it's an interesting point. And that you mentioned it's sort of out of season, so these price jumps are a little unusual just in terms of the timing, but I think it's a cocktail of factors, really. Demand for MOP in both the U.S. and Brazil have been helped along by strong crop fundamentals, high planting acreages, high crop prices. Affordability of potash is still good. And we have tightening supply particularly for granular MOP, which has given producers more opportunity to pick high-price locations in some cases for their MOP sales. So that's already structurally the situation on the potash markets. Then of course any news that lends itself to a reduction in supply like the situation in Belarus or the recent news that Mosaic's Esterhazy K1, K2 mines have closed early, compounds an already jumpy market. And you get this surge of forward-buying and expectation of ever-higher prices. David, in terms of how long we expect prices to rise, I would say that the way things look today we can expect no significant reductions in prices for the rest of the year. But I don't know. We haven't checked in on this recently, so I'm not sure what you think.

David: Yes, so I think I would agree with you on that. And I think for me, what we're also seeing from the supply side is there's no easy option to kind of ease the tightness in the market. There aren't that many projects that we're forecasting to come online this year. There's really kind of ICL's Spanish consolidation, and we've already discussed the potential delays to Belaruskali's Petrikov mine. So there's not a lot of new capacity that we have in that kinda short-term pipeline. And the other lever that suppliers would have would be if they could tap into any inventory buildup. But what we saw last year was inventory that had been built in 2019 was really sold quite heavily in 2020. So it seems like a lot of producers started the year with relatively low stocks. I mean, particularly notable was Uralkali, they only produced 11.3 million tons compared to selling 12.7 million tons last year. QSL also sold around a million tons more than they produced because of the tightness of the market in China last year. And ICL as well has had kind of a year under inventory drawdown because of disruption to their mine operations in Spain. So they've relied heavily on inventory to keep their output commitments going. So all of that I would agree with that we are in for a kind of an extended period of quite high prices because of that market tightness and because there's no easy lever for the suppliers to pull to rapidly bring additional tons to market.

Tim: Yeah, I guess we're seeing...because we're seeing multi-year highs just currently on potash prices, there must be some producers that are wishing they'd kept some inventory back. I presume when they were in that situation last year you described where they thought they were getting the best terms they could really, so they took advantage. But this strength is unexpected and therefore, we have to see what suppliers can do to respond. David, I wanted to ask you looking longer term, are there projects that can be accelerated by the current price environment? Do you think projects will move faster? Is there a particular project that you have that you are looking at particularly closely because it'd have a big role in the longer-term supply situation? I know that BHP and Nutrien are being reported to be discussing some kind of deal to do with Jansen. Tell us about longer-term project activity.

David: Sure. So really the two things that we're monitoring, one of them is your EuroChem's ongoing capacity expansion and growth. And it will be interesting to see whether they do accelerate that in the current price environment because early in the year, we weren't expecting much growth from the Usolskiy mine which is the one that's already operational. And the second mine at VolgaKaliy we were expecting to stay in test production. So it will be interesting to see if they do accelerate that and they bring more tons to market. But really this kind of BHP Jansen story is very impactful for our more medium-term forecasting. So we're currently projecting that will come in, in the middle of the decade. But basically, BHP now considering Nutrien as a potential partner on its Jansen project does alter the way that we view that somewhat. So we have had that project in our forecast for a while. But it does improve the outlook for the project in some ways if there was a partnership between these two.

For BHP, they get kind of access to Nutrien's experience, which is invaluable in that area. They don't have to compete so much on the marketing front especially if they align with [inaudible 00:18:10] and then kind of incorporate it into that sales and distribution framework. And that means they can bring the mine to market progressively without having to set up their own infrastructure network to start with. So some of the capital costs that we still expect for that project are the likes of kind of a new port development, which hasn't been finalized yet. But if it was cooperating with Nutrien, it could probably use Nutrien's ports on the kind of west and east coast of Canada to distribute and get cash flow before having to invest in a port on its own.

And then on the other side of that partnership, for Nutrien, it's beneficial because it just reduces the amount of competition that it would be seeing in that kind of medium-term section of our forecast. So the potash market being oligopolistic, you have very few suppliers in there and that's what allows prices to stay relatively high because there's this kind of lack of different producer options. So in the same way that we're seeing Belaruskali slipping at the moment, and there's not that many people who could replace them. BHP, if they came in as a separate entity, would compete with Nutrien and would have a similar kind of cost profile to Nutrien. But if they're coming in and they're cooperating, it's likely to be a more measured approach. Nutrien typically prioritizes price over volume. So really then in the same markets they would be cooperating and that's something that we would expect to see prices supported at higher levels in a kinda medium-term forecast. So it'll be very interesting to keep monitoring that situation and see, well, if anything does come out of it because depending on whether BHP goes into this alone or whether BHP goes into this with Nutrien I think the kind of outlook and the impact in a longer-term forecasting would be quite different.

Tim: Yeah, it's really an interesting dynamic to think about. And also, the other thing I find fascinating is I guess when BHP conceived of the project, agriculture and food production was a global priority. Of course it still is. But one of the new things coming up the agenda is electrification and battery metals. And, you know, you can kind of understand BHP shifting its focus potentially, or it's, you know, it's resources towards projects that are more in line with battery metals and therefore, a deal with Nutrien to reduce its exposure to potash might make sense.

David: Yeah. So it's shown an interest in the fertilizer sector and going into the sector before. But as you say, the investment here would have to compete with its other business assets. And so a kinda diversified miner. So it will invest where it sees the best return, but this might be a way for it to continue to enter that market where it sees long-term growth potential but with lower exposure at the moment when, as you say, its other business interests are really going from strength to strength.

Tim: Well, thanks, David. Thanks, Ewan. We've come to the end of the time we have today. But we are at a period of real volatility in potash prices, and so we'll continue to follow the markets closely. And please get in touch with either Ewan or David if you have any questions. If you're a subscriber to Argus Potash, the Market Report, or Argus Potash Analytics, please download the reports from Argus Direct, that's our delivery platform, or you may receive them on email. And the latest quarterly issue of Argus Potash Analytics was published at the end of May so it's fresh. If you're not a subscriber, please get in touch with your account manager. If you're an Argus customer, visit the Argus Media website for more information about how to subscribe. We'd love to have you on board. If you did enjoy the discussion today, then please like, subscribe, or follow us on whichever platform you use for your podcast so you'll get alerted to the next episode and we can keep you up to date. Until next time, goodbye.