Inside Fertilizer Analytics: Potash, Mar. 2021

Author Argus

Traditionally steady potash prices have experienced surging upward momentum recently, particularly in the US.

On the demand side, crop prices have been very supportive in the US and Brazil, while on the supply side limited new capacity has caused tightening of the supply-demand balance.

Join David Riley, Lead Potash Analyst, and Tim Cheyne VP, Fertilizers as they discuss these developments and the impact of freight price increases, the influence of the BPC India and China contracts, other key regions to keep an eye on and what key projects we're monitoring for the longer term capacity outlook.

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Tim: Welcome to the latest issue of our Inside Fertilizer Analytics podcast. On each podcast, one of our key market experts joins me, Tim Cheyne, to discuss the future of fertilizer markets, and reflect on some of the biggest developments going on, and what they mean for the future. I am in the business development team. And today, we turn our attention to potash, so we'll be talking about all things K. And I'm very glad to be joined by David Riley, who is our lead potash analyst at Argus, and he's just published the latest quarterly issue of Argus Potash Analytics. So I've asked him to join me, and for us to chat about some of the key findings and conclusions from the work he's just done. Welcome, David. How are you today?

David: I'm good. Thank you, Tim. Thank you for having me.

Tim: Well, let's jump straight in. Often potash could be accused of being quite stable and steady, but I think it's clear to say that at the moment, potash is exciting and there's a lot going on, prices are rallying, and we're seeing some differentials moving in directions that aren't expected. So, talk me through what's going on with potash prices, and what's happening in the last few weeks and months that differentiates this year from certainly last year, and the year before?

David: Sure. So, there's been a lot of upward momentum in the market recently, I think the main region that we've really seen that in has been the US. So there was a strong agricultural season in the US last year, and coupling that with good financial support for farmers, the phase one trade deal with China kicking in, and rising crop prices across the board, we saw a real boost to fertilizer demand in the US. Now that, combined with relatively low import volumes coming into NOLA, so fairly typical volumes coming south from Canada, but the offshore imports into NOLA were quite restricted late last year, and that created something of a supply bottleneck coming into NOLA. And that really has tightened the market there, and we've seen some very dramatic and impressive price rises. So we've seen the FOB NOLA prices exceeding $350/t, which is a level we haven't seen since 2015. And the interesting thing there is it's got the US to a premium on the Brazilian market, which is very unusual, so there's been good upward momentum in the US. And as demand has continued to grow, and we've seen inventories drawn down, although there have been more shipments coming into NOLA, there's still a strong demand outlook, and that's something that we're seeing supporting prices, and continuing this price rise there in the early part of 2021.

Tim: So, you've described the movements and prices, and the strength we're seeing. We're seeing these commodity prices rally, really, in many classes, and can you just describe to what extent the potash price surge is linked to crop prices currently? We know that farmers, U.S farmers particularly are doing well in terms of their cash situation, is one of the key drivers of this potash price surge to do with crop prices, or is it much more to do with the supply side? Or what do you think has been the real push most recently?

David: So, certainly on the demand side the crop prices have been very supportive. We've seen that in the U.S. We've also seen that in Brazil, where the soybean acreage has been growing quite substantially, and that's been supported by the soybean prices and also devaluation of the Brazilian real compared to the U.S dollar. On the supply side, what we've been seeing is tightening of the market supply/demand balance. So, potash has a degree of inherent oversupply, with a lot of capacity in the hands of certain large producers. But these producers have been exercising a degree of discipline recently, and that's been acting to tighten the market globally. So, that has been a fairly supportive factor for prices worldwide.

Tim: Talking about producers, David, one of the interesting contracts that was agreed recently was the BPC contract into India, that contract was agreed at a lower price, I think it's fair to say, than most people expected, and that contract lasts for the full calendar 2021. Can you just describe what impact that's had or could have for the rest of the year, and how other buyers and sellers have responded to that agreement, that lower price level in that agreement, in terms of their own buying and selling behavior?

David: Sure. So, we saw the Indian contract price agreed at the end of January this year, at $247/t cfr, which was only $17/t increase from the previous contract we saw in the middle of last year. And this was an agreement done at a time when there was a very urgent need for MOP amongst NPK producers in India, and market indications widely were very bullish. So the expectation was for quite a high rise in contract prices, and this was lower than was expected by most market participants. We then saw China follow suit a couple of weeks later for the same price, and they were also settling earlier than maybe a lot of people anticipated, suggesting that they viewed this as quite a favorable contract price. The Indian contract price prompted public statements from suppliers outside of BPC. So as you mentioned, BPC was the one who agreed that contract price, but other suppliers such as Canpotex, Uralkali, K+S all released press releases saying that the contract price agreed did not fit with the market indications, and K+S went so far as to say it will refrain from delivering to India at that price.

Now, with the ongoing social disruption we've seen in Belarus, there is probably a desire from BPC to settle tonnages, so there may have been some other non-market factors at play in that agreement. But when you factor in how freight costs have changed from the last, the last contract was agreed in the middle of last year at a time when freight rates for bulk rate were very low due to the global downturn in fuel prices. Now freight rates have spiked because there's significant demand on the bulk freight market, and in fact, that difference in freight costs really swallows up most of the increase that we've seen in the contract prices. So, the producers aren't seeing much of an increase on their end at all in this price. What that means for the wider market is that China and India will be receiving MOP at low prices this year, which will be very supportive for demand in those two countries, and the suppliers will probably look to target spot markets ahead of these contract markets. So, the two contract markets are very large, and probably too big to ignore entirely, but in the spot market, so the likes of Brazil and the US, the netbacks these suppliers can receive are a lot better at the moment than on those contract markets. So we will probably see producers preferentially shipping to the spot markets, and as a result, there will be a little bit more competition there, which maybe will put a bit of a cap on the price increases we're seeing in those spot markets. But really, that's going to be the balance we see this year between the very strong spot market growth supported by agriculture, and the much lower contract prices that have been agreed acting as a bit of a dampening factor on price increases.

Tim: That's a fascinating tension that you've just described, that difference between where the spot market seems to be...well, certainly is currently, and where it seems to be heading, and those contract prices. And also, you point to the increase in dry bulk freight rates, which no one would have predicted, certainly they didn't predict at the time of agreeing those contract prices. Just thinking about the year ahead, and likely drivers of the supply/demand balance, you mentioned the strength in North America on the demand side, with farming, crop prices and farming being very buoyant, and you mentioned Brazil looking quite positive. Which other regions would you point to as regions we should look at, which could surprise us or could provide some support for prices in the next year?

David: So, one region that's particularly worth monitoring this year is Southeast Asia. If you go all the way back to 2019, there was limited purchasing there, and that meant that we started 2020 with the expectation that that would be a robust demand year for Southeast Asia. Now, a lot of Southeast Asian demand comes from the crude palm oil market, and Covid-19 had a fairly significant impact on palm oil demand. It was also disruptive on the migrant labor forces that are used to produce that, so really, we didn't see the demand rebound we were expecting last year. As a result, you still have those drawn down inventories, but now we are expecting to see a rebound in Southeast Asian demand this year. So, that's probably the main region to watch for significant growth year-on-year.

Tim: Right, so CPO and Southeast Asia is the one you're keeping an eye on to look for demand increases. Let's turn to supply, and of course, new capacity coming on-stream is always something to be mindful of. So, what supply, or new supply do you see entering the market during the next year, which could have an impact on that supply/demand balance?

David: So, a lot of the major projects that are active right now are more site consolidation or replacement, so I'm thinking the likes of Mosaic's Esterhazy K3 shaft, which is replacing the K1 and K2 shafts at the same site, where they had brine inflow issues, or ICL's site consolidation in Spain, or Uralkali's ongoing works in Russia, where they're seeing some of their mines reaching the end of their lifespan at the same time. So really, the overall net impact on capacity is quite limited this year, and in fact, with demand growing, we're expecting to see the supply/demand balance tighten. The only greenfield new capacity expansion to be very mindful of is Belaruskali's new 1.5mn t/yr capacity mine at Petrikov, which is the first mining those more southerly deposits in Belarus, although because we're expecting that to be commissioned this year, we expect its commercial output to be relatively low.

Tim: Right. So, that really is the basis for the tightening supply/demand balance that underlies our relatively buoyant forecast. Let's talk about the longer-term capacity outlook. There are some fairly beefy projects in the pipeline, some of them approaching final investment decisions. So, which are the key projects that you're tracking, and you think could have a big impact on longer-term MOP supply or general potash supply, you know, in the next project cycle, let's say, in the next five to ten years? Which are the ones that really are headline in your mind?

David: So looking more medium- and long-term, we've obviously got the ongoing ramp up from Eurochem, they've reached phase one capacity at Usolskiy this year, so we can also look for phase two expansion there, and at the same time, potentially bring VolgaKaliy online later down the line. And then moving into medium-term and more into the middle of the decade, there is a wave of new investment from new market entrants, so the like of Slavkaliy with Nezhinsky mine, Acron's Talitsky mine, so that's in Belarus and in Russia. And then especially BHP's Jansen mine, with its 4.5mn t/yr capacity that is expected around 2026, if it goes through with final investment decision due the middle of this year. So the impact of those new investments is not just boosting capacity and boosting supply, and kind of loosening the tension that's developed in the supply/demand balance, because they're coming from a wave of new market entrants, it will also bring a degree of competition to a traditionally oligopolistic market structure that we see in potash. So while the tight supply/demand balance is supportive of prices in the immediate future, this new wave of investment later in the decade could be something that we see depressing prices when there's more competition for market share.

Tim: That certainly is important to track. And the structure of the potash market being oligopolistic is something which is difficult, I guess, to predict in terms of its future developments, and one of the things we keep a close eye on, I know. The time we have today is up, I'm afraid. So David, thanks very much for sharing some of those perspectives, and we look forward to talking to you next time.

David: Yeah, thank you for having me, Tim. It was a pleasure.

Tim: And thanks for listening, everybody. The work that David's been sharing from today is part of the Argus Potash Analytics service, and David's just published the latest quarterly issue of that service, which is now available on Argus Direct. So if you're a subscriber, please go in and download that. We're also going to be issuing...or publishing an extra section of project reviews in the next week or two, so keep an eye on your Argus Direct, or your emails, to see more information about the Jansen mine, and the Anglo Woodsmith project. Also, as part of your Potash Analytics service, there is the annual long-term report, which is also available on Argus Direct. That's a report that's longer-term looking, and covers our long-term demand forecasts, and also our long-run marginal cost analysis, which is the basis for our long-term price forecasts. So, a much more detailed, long-form report that's perhaps useful for you if you're thinking about longer-term issues in potash. We'll be returning to talk to David again next quarter, to discuss the findings of his next report, which will include SOP. So, we look forward to that discussion.

If you aren't a subscriber to Argus Potash Analytics, please do visit Argus Media website, where you can find out more information, and you can certainly subscribe if you need that analysis for your own work. If you enjoyed this discussion today, please like or subscribe or follow us, depending on how you were listening, because we'd love to have you back next time. Thank you, and goodbye.