By Steve Halabura
For potash markets, maybe the commotion of 2022 and 2023 is over. Maybe producers no longer worry about supply disruptions, the effects of war and economic sanctions upon production and demand. Maybe capital markets are stable and share prices will reflect the underlying true value of assets.
Maybe…
I’ve followed the general sector sentiment for the past years and as anyone who follows potash closely, we agree that if nothing else, it remains a somewhat opaque market. There is some consensus, this being that the effects of supply chain disruptions and sanctions against Russia and Belarus were probably short-lived and not really the bogeymen’s many pundits (including yours truly) who initially described them to be.
The high price points achieved in 2022 have faded away, and for the short period that prices were stratospheric, producers made out famously, as did those who underpinned potash financing, such as capital markets. However, as happened during the price spike of 2008, high prices destroyed sales, as the bulk of potash is sold to farmers who cannot afford major input costs. But like in 2009 and 2010, buyers return once prices settle back down.
What does the present look like when compared to the near past? Below are the Province of Saskatchewan’s figures…
In January 2024, the province’s mines produced 1,418,594 tonnes (K2O) of potash, as compared to the production of 1,156,699 tonnes (K2O) in January 2023. This is an increase of 22.6 per cent over the 12-month period.
Sales during the same period were $762,955,968 in January 2024 as compared to $920,098,455 in January 2023, which is a decrease of 17.1 per cent.
Realized pricing was $537.83 per tonne (K2O) in January 2024 as compared to $795.45 per tonne (K2O) in January 2023, which is a decrease of 32.4 per cent.
Compared to a year ago, while price per tonne has decreased, production has increased, which to me demonstrates that 1) demand destruction due to high prices is a factor, i.e., as price drops, farmers begin to buy again; and 2) Saskatchewan’s mines continue to produce, even with the significant price drop from 2022 highs.
I place significant weight upon the observation that the price decrease has not impacted the producers that much, and I attribute this to the efficiency of existing Saskatchewan producers and the fact that current mines are long-established and thus well tuned to respond to price volatility.
Given that almost all Saskatchewan mines (except newcomers such as K+S) are approaching 60 years of operations, it is very likely that they can achieve low cost-per-tonne production and can make a healthy profit even at a price that is half of what it was in 2022. In other words, they remain fierce competitors in a global marketplace that still seeks out the lowest per-tonne product available.
Saskatchewan’s production numbers continue to show a two per cent increase in demand on a year-by-year basis. Given Saskatchewan’s dominant role in global markets, I think its safe to attribute a two per cent annual growth rate in demand for all markets, and this is probably conservative.
Unfortunately, the long-term stability of potash as a business is not reflected in the share prices of publicly traded companies that continue to trade lower than 2023 values. This could be the market’s reflection on potash pricing, but I think it may be more of a function of the producers being integrated fertilizer manufacturers rather than pure potash plays.
In looking at these factors, it seems to me that the sector has returned somewhat to pre-covid behaviour, where steady increase in demand may (or may not) lead to incremental increases in pricing, and producers focus upon being the lowest-cost producer on the block.
Nevertheless, all the above are not justification for complacency and “business as usual”. I do see storm clouds on the horizon:
- Canadian producers face challenges related to decarbonization: Those of you who are not residents in Canada, be informed that the federal government has imposed a strong mandate to decrease the effects of climate change through curtailment of carbon emissions, which has an effect throughout the production and transportation process.
- Access to unlimited water supply is threatened: The Canadian prairie provinces may be facing drought conditions this summer, thus increasing the competition for potable water between farmers, rangers, municipalities, and large industrial users such as the potash sector. I do not see this being different in other jurisdictions, such as the U.S.
- Impact of inflation (and costs such as carbon tax) on cost of transportation: See factor one above. In Canada, a tax is imposed on a myriad of services, products, and activities, the intent being that this will provide an incentive to “decarbonize”.
- The war in Ukraine continues without any resolution in sight: Could we see price spikes again if there is significant escalation, or if Russian and Belarusian production decreases? Probably.
- Replacement of aging mines: While the long-term nature of most existing mines is an asset, it also represents a potential threat. Yes, there are limits to growth (remember Esterhazy K1 and K2?) that require the replacement of very expensive infrastructure, i.e. shafts.
- Global climate change: Potash makes plants more drought resistant, which bodes well for demand growth. However, there is also the threat of desertification, which removes soil from agricultural purposes.
- Cost of production and technology: Given the market pressure for “lowest cost per tonne”, are existing producers really using the most efficient mining and processing technology?
- Replacement of existing centres of production: While I do not see as a potential threat the “discovery of an enormous basis with extensive deposits of very rich potash” as being very likely, there are enough smaller basins with just enough potash in them that they could replace existing North American producers, if there is technology that allows for efficient mining. This is especially so if these “just good enough” basins are close to large buyers.
- Sudden disruptions to demand growth: In this scenario, the somewhat stable annual growth in demand is disrupted by a sudden surge in production caused by intentional (or otherwise) production capability. This occurred in the late 1960s, where over-building of mines in Saskatchewan lead to an oversupply situation that damaged the fine balance between supply and demand for decades.
The above factors represent both positives and negatives, and it would be foolish to try to predict the outcomes for each case. But is there a strategy to derisk (or at least mitigate) some of these risks?
Maybe it’s these, for starters: rethink how new mines are to be built, and explore innovations in mining and processing technologies that decrease the need for scarce inputs such as energy and water. Embrace ruthless efficiency in slashing unnecessary expenses to ensure that low-cost production becomes a tangible reality, not just a fleeting notion. Shorten the supply chain by eliminating all market intermediaries and sell product directly to distributors.
‘Nuff said…
