The Chatter on Global Potash

November 20, 2015 12:20 PM

The outlook on fertilizers has been tough to figure. There are a few things that we do know, however and it is clear that manufacturers are scrambling to protect their bottom lines. This is most evident in the potash sector where producers from Russia to Israel to Canada are all looking to profit despite a global potash oversupply. Since potash is mined, producers are able to supplement potash sales with sales of other mined products like salt and polysulfate where they can. Canadian producers have cut production to maintain margins. Meanwhile, Uralkali and Belaruskali are reportedly producing at the top end of capacity although recently, Uralkali has suggested a small production reduction in response to lower global potash values.

So let's take a quick look at the current dynamics between the two powerhouse production regions and see what we can apply to the outlook. First of all, potash this week is priced $56.69 below the same week last year at $421.83. That's a significant decline which, as of today's open in December 2016 corn futures at $3.91, places potash priced well below a bushel of corn at $3.57. That should bring some buyers to market for vitamin K, but lower corn prices will also keep a wet blanket on potash demand.

11202015PotashCanpotex is comprised of PotashCorp, MosaicCo and Agrium and is North America's largest potash exporter. Canpotex is in direct competition with Former Soviet Union (FSU) producers Belaruskali and Uralkali. The Canpotex players have curtailed production in both potash and phosphate. MosaicCo has left their Colonsay mine offline since August. PotashCorp had been aggressively working on acquiring at least a portion of German potash and salt producer K S earlier this year but appears to have abandoned the pursuit.

The idea was that PotashCorp was looking to create a greater European footprint although K S is working on a Canadian project of their own and many believe the acquisition was as much a play toward stopping K S from gaining a Canadian foothold as anything.

Despite curtailed North American potash production, Canpotex's marketshare remains secure. Potash is an expensive business to get into and the field of miners is relatively small. Since other producers, especially the FSU miners, are producing at the top end of capacity, the market is oversupplied, and Canpotex has to do very little in the current environment of low potash returns to discourage new entries.

Since the split of the FSU joint venture Belorussian Potash Company, former partners Uralkali and Belaruskali have been in a production war. Each is producing at the very top end of capacity and doing what they can to manage global potash prices. Belarus was recently awarded the right to export potash to the United States after a human rights based embargo had been imposed. Since the end of the embargo on potash, Belarus has been very aggressively exporting to both the U.S. And China, contributing greatly to the global oversupply.

Belaruskali has the upper hand on Uralkali as it was able to ink a deal with China early on in the export season at a price that undercut what Uralkali and Canpotex were planning to offer. That was a major contributing factor to the Canpotex slowdown. Reports have surfaced that China is once again looking to negotiate large potash contracts and one can be certain that Belaruskali will look to steer the negotiations below the offering prices of Canpotex and Uralkali.

11202015IndexIn response, Uralkali has said it will cut potash production in an effort to slow the tide of product rushing onto the market and to put some support under potash prices. That marks a significant shift from when Uralkali broke from the joint venture with Belaruskali. When the split took place, in true Russian form, Uralkali promised to produce enough potash to garner marketshare and force prices to low levels that would force other global potash players to tighten their belts. That strategy failed and they appear to have rethought their volume-over-price strategy at least for the time being.

When everybody is making money for their shareholders, the potash industry is generally very quiet. When U.S. crop returns are strong enough that the production budget can handle plenty of fertilizer, farmers are willing buyers and understand that potash is a vital component in a successful crop. There is an awful lot of noise coming from the potash sector these days and producers make it no secret that they need to encourage cash flow. We expect the global oversupply to continue possibly through next year's harvest. That will keep producers looking for ways to trim expenses and maximize returns to shareholders.

But producers also have to be mindful of marketshare. With Belaruskali horning in on U.S. demand and undercutting contracted prices which set the global price floor, Belarus currently has the upper hand on all other players. Their strategy has its own elements of volume-over-price and as partner turned rival Uralkali talks of reducing production, we have heard no such news from Belarus. If Belaruskali can hold on and continue to produce potash volumes large enough to answer global demand while undercutting the rest of the industry on price offerings, Uralkali's former marketshare grab will favor Belarus.

Meanwhile, as the FSU powerhouses fight it out, there is so much potash circling the globe that Canpotex really just needs to maintain their margins, return acceptable profits to shareholders and weather the oversupply as best they can. For Canpotex, just staying in business is enough to discourage competitive new entries into the potash space.

For us, all of this talk of curtailed production and oversupply are a signal that prices are low and will likely stay that way for a good long time. As U.S. farmers harvest another very large corn crop this year, soil nutrition will require them to replace what a 165 bushel crop pulls from the soil profile. That will keep demand alive and place something of a floor beneath prices. But, as I noted earlier, in terms of a bushel of cash corn, potash is priced currently for $3.57. That number is clearly tough on potash producers, but will benefit farmers and their soil greatly in a time when growers are squeezing every bit of value they can from an acre of ground.