By Melanie Franner
The fact that it took China and India (among the largest purchasers of fertilizer in the world) until the third quarter of 2016 to sign their annual potash contracts with Belarusian Potash Company (BPC) does not bode well for a rebound any time soon for the global potash industry (in which Canada contributes approximately 35 per cent of the market).
It is also disturbing to note that the contract with the Chinese was for the lowest price in over a decade – $219/tonne, which is approximately 30 per cent lower than the 2015 contract price.
India inked its deal with BPC for 700,000 tonnes of potash at $227/tonne a month just prior to the Chinese deal. The quantity of potash sold to China was not reported.
“China and India are very shrewd negotiators,” explains Steve Hansen, equity research analyst, Raymond James Ltd. “In contrast to most markets where potash is sold to a diverse group of buyers under short-term commercial terms, China and India leverage their collective purchasing mandates to negotiate bi-lateral, long-term contracts – deals that typically set the near-term floor price globally.”
Wait and see
According to Hansen, one reason for this year’s contract delays was elevated inventory levels that afforded both countries the ability to draw out negotiations in search of a better deal.
“I think China and India sat back and adopted a wait-and-see approach, particularly in light of the intense pressures already weighing on spot markets,” he explains.
The other complicating factor that affected spot pricing, adds Hansen, was the drastic decline in crop prices and currency depreciation against the U.S. dollar for some of the other major potash-purchasing countries, such as Malaysia, Brazil, and Indonesia.
“These factors decreased the affordability of potash for many key international buyers,” he notes. “And once affordability becomes an issue, prices naturally need to adjust lower.”
That being said, Hansen suggests that China and India had a lot of inventory on hand to help them ride out a lengthy negotiating process.
“They usually need product in advance of the peak spring demand period, but because of all the supply availability, they were able to bide their time and place some major pressure on the supplier group.”
And the waiting proved advantageous to them, given the soft demand for potash and the oversupply in the market.
The future is dim
Although Hansen admits that the global demand for potash is anticipated to increase by approximately two per cent per year, he doesn’t hold out much hope for a significant pricing rebound any time soon.
“Frankly, it’s a structurally over-supplied market,” he says. “We might see a modest near-term price rebound because Canpotex producers have reigned in production, international contract volumes are now moving, and there is typically a seasonal uplift heading into the busy spring period, but further long-term upside is likely going to be capped by upcoming supply additions.”
Another complicating factor is the increased supply of potash coming onto the market, thanks to the new Garlyk mining and processing facility in northeast Turkmenistan (a joint venture between the Republic of Belarus and Turkmenistan) and the commissioning of the Saskatchewan-based K+S Potash Canada’s Legacy project. Both are expected to come on-stream in 2017, with the former producing 1.4 million tonnes of potash (of which one-million tonnes will be available for export) and the latter producing two-million tonnes of potash. Russia-based Eurochem is also expected to start commissioning the first of two new potash mines under construction late next year.
According to Bloomberg Markets, Uralkali has also signed deals with China and India – 600,000 tonnes to China and 650,000 tonnes to India. The contracts will run through July 2017.
Closer to home, PotashCorp president and chief executive officer Jochen Tilk spoke of a more cautious approach to China and India. He made his comments in a statement within the company’s Q2 Earnings Report. Among his remarks was the following:
“With customer sentiment improving and announced industry shutdowns, we anticipate a more supportive potash environment through the balance of the year. Importantly, we see the potential for record demand in 2017 with annual shipments in the range of 61-64 million tonnes, as strong affordability incents farmers to replenish soil nutrients. We are positioned to benefit from an improved environment next year and we support Canpotex as they take a cautious approach to the Chinese and Indian markets, committing volumes only through the remainder of 2016.”
The years ahead
Despite the cautious optimism from Tilk, most analysts suggest that the pricing for potash in the near years ahead will remain pretty much the same as it currently is – somewhere in the US$200 to US$300 range.
The current combative environment between Uralkali and Belaruskali, coupled with a wave of new supply still coming, make for depressed pricing all around.by