by Steve Halabura
One year ago, I sat at my desk and considered the year 2021 from the potash perspective. Coming up with news items was a challenge because 2021 was a year during which potash supply and demand remained relatively stable, leading to overall price stability. Nevertheless, the effects of the COVID pandemic on supply chains and some mine supply challenges led to significant increases in the global and “farmgate fertilizer” price.
In wrapping up the article, I smugly opined that “We also cannot ignore the impact of Acts of God”. For me, “Acts of God” were floods and landslides that curtailed Saskatchewan potash shipments to the west coast, as well as further sanctions against Belarusian potash exports. I closed by stating “several of these changes to the potash landscape will, in my opinion, make 2022 as bullish to producers as potash’s last ‘wave’ during the years 2005 to 2010. Will 2022 see record prices? I think so.”
In some sense, I take some minor comfort in seeing my prediction come true; however, I take no joy in the nature of the “Act of God” that has driven potash to prices not seen in decades.
Russia’s invasion of the Ukraine has created a storm of change across the world. This act, when coupled to other “Acts of God”, including climate change, hunger, and financial turmoil, is forming a future that I think few of us are capable of discerning.
2022, unlike 2021, has given us new buzzwords, like friend shoring, critical minerals, and “conflict” versus “ethical” potash. When was the last time anyone in the industry had to expand their vocabulary in such a dramatic fashion?
So… where to begin?
Simply put, war has put the export of million tonnes of potash normally supplied by Russian and Belarusian mines in jeopardy. By the way, when I use the word “tonnes”, I mean “tonnes K2O”, except where I quote what I believe to be a number in “KCl” tonnes. There seems to be a consensus that Saskatchewan’s annual production as some 14 million tonnes, compared to Russia’s production of 8.1 million tonnes and Belarus’s production of 7.7 million tonnes, or an aggregate 15.8 million tonnes.
I don’t believe sanctions have eliminated some 16 million tonnes from the global market, as I have no doubts that the sanction barrier is porous, and Russian and Belarusian potash is being bought in the marketplace. But let’s assume there is a swing in market demand from “conflict” to “ethical” potash and this swing leads to a 50 per cent decrease in demand for conflict potash. This creates a new market for ethical potash of eight million tonnes. If it’s a 75 per cent swing, it’s 12 million tonnes, which is almost equal to what Saskatchewan will produce by the end of 2022, which I estimate to be 14.5 million tonnes.
I’ve also been around long enough to know that market opportunities do not last forever, meaning that if friendly producers are able to take some of this market share, they should do so now. It may also be the situation that the swing to ethically sourced potash is more talk than action, and no market significant market gap develops, which is a risk to new, or expanding, producers.
One aspect of the year that I cannot argue against is the extraordinary movement in potash pricing. I will continue my practice of following the public reporting of the free world’s largest owner of potash resource – the Province of Saskatchewan. As always, check it out yourself at this link: https://dashboard.saskatchewan.ca/business-economy/business-industry-trade/mineral-sales#by-commodity-tab.
Let’s compare the month of September 2021 to September 2022 first. In 2021, Saskatchewan mines produced 1,361,108 tonnes (K2O), while in September 2022, those same mines produced 1,049,958 tonnes, a decrease of 22.9 per cent. September 2021 sales were $814 million, but September 2022, sales were $1.616 billion, an increase of 98.5 per cent.
Now let’s compare year-to-date production. During the period of January to September 2021, Saskatchewan mines produced 10,681,878 tonnes (K2O), however during the same period in 2022 those same mines produced 11,003,946 tonnes, an increase of 3.0 per cent. Sales during this same period in 2021 were $4.965 billion, but $13.494 billion in 2022, an increase of 171.7 per cent.
We can use the above to estimate an average per-tonne realized price. In September 2021, this was $598 per tonne versus a September 2022 price of $1,539. When we look at year-to-date numbers, the average per-tonne realized price for 2021 was $451, however in 2022, it was $1,226. Year-to-date numbers are a more accurate estimate of overall production sales, so using these shows that price increased some 2.7 times.
With one more quarter to go, it is conceivable that Saskatchewan will see production of up to 15 million tonnes of potash in 2022, with revenues from sales up to $15 billion.
Yes, an enormous resource windfall to the province and to Saskatchewan potash producers, but as I mentioned this summer, this is almost entirely due to price, not an increase in production. This begs several questions: will prices fall if more “friendly” production hits the market? And, are friendly producers operating at 100 per cent capacity, thus requiring the need for new mines? Let’s investigate this.
In a government release dated June 22, 2022, Ken Seitz, CEO of Nutrien, was quoted as saying that “In addition to increasing potash production by more than 2.0 million tonnes since 2020, Nutrien will invest in the province of Saskatchewan to accelerate potash production capability to 18 million tonnes (KCl) by 2025, and continue evaluating a pathway to 23 million tonnes (KCl)”. Since the same article suggested Nutrien produced about 13 million tonnes (KCl) in 2020, its present production capacity is therefore 15 million tonnes (KCl). This means Nutrien has the capability to add three million more tonnes by 2025 and an additional five million tonnes at some future date.
Similarly, in May, Mosaic’s president and CEO, James O’Rourke offered that reduced supply could extend beyond 2022, opening the door for producers outside Russia and Belarus to consider boosting output. Mosaic said in May that shortfalls in Russian and Belarusian potash is impossible to replace, adding that “Belarus remains sanctioned and our previous assumption of those tonnes coming back mid-year appears optimistic as most or all of their exports will be curtailed due to logistics”. In a May 2, 2022, press release, Mosaic announced it was capable of 10.8 million tonnes (KCl) MOP production from its mines, however it “has the potential to grow by an additional 1.5 million tonnes (KCl) by the second half of 2023”. Despite these earlier sentiments, it announced temporary closure of its Colonsay mine, citing lower than anticipated demand as the reason for shuttering production.
Soon to follow was K+S Potash Canada (KSPC) announcement of a long-term growth plan, consistent with the K+S Group’s global strategy, based upon achieving a sustained increase of potash production at its Bethune mine. The final production capacity is intended to grow continuously over the next couple of decades and is currently targeted toward four million tonnes per year, effectively doubling the current production output of the operation. If K+S is presently at two million tonnes, this means it can add another two million tonnes by the end of the decade.
BHP Billiton Canada Inc. (BHP) had earlier announced its decision to proceed with its Jansen mine, located in the heart of the Saskatchewan potash basin, and that it had budgeted US$7.5 billion for its Stage 1 buildout with production forecast to begin in 2027 and ramp up to full production of 4.4 million tonnes (KCl) per year by 2029. In May 2022, BHP announced that it is advancing its Jansen Project to achieve Phase 1 production in late 2026, which is planned to reach 4.35 million tonnes (KCl) with CAPEX of $5.7 billion.
Considering the above statements by the Saskatchewan producers, the bottom line seems to be this: the Saskatchewan “Big Four” presently produce 16.7 million tonnes (K2O) and indicate that expansions will bring an additional 1.6 million tonnes (K2O) by some point in 2025 to 2026, with an additional eight million tonnes (K2O) by 2030. Rounding off means some 10 million tonnes by the end of the decade.
In summary, the eight-million-tonne ethical potash gap may be filled by the end of the decade, without accounting for normal demand growth and what surely must be declining production capability from Russia and Belarus. Unfortunately, the war in the Ukraine is today, and sanctions are today, so if you agree with this scenario, demand will continue for the rest of the decade.
Decreases in wheat and other foodstuffs from the Ukraine and Russia are driving farmers across Asia to increase crop production, which will lead to an increased demand for fertilizer, including potash. Assuming a modest one per cent growth in demand, there may be an additional two million tonnes of potash required over the next five years.
To summarize, what does the ethical potash gap mean to emerging producers like the “small mine” sector or countries with a potash deposit seeking to restart their homegrown industry?
Those who follow my columns know I am a proponent of what I’ve begun calling “small modular potash”, or “SMP”. This is a production methodology that seeks to develop smaller footprint potash mines that produce up to 500,000 tonnes per year, but that can be expanded as required through the addition of more mining modules. Examples include Saskatchewan-based companies such as my own enterprise, Buffalo Potash, and others such as Gensource, Western, Karnalyte, and Beechy. If any group can lay claim to the moniker “ethical”, it is the SMP’ers.
In Canada, Western Potash Corp.’s Milestone Project was able to refinance its operation and is at last report restarting its caverns and resuming construction. The others, including Buffalo, continued their work to raise capital to advance their businesses forward. While sales markets are robust, the global chill winds of inflation, financial turmoil, and recession make fundraising a complex and time-consuming task. Nevertheless, the ethical potash gap offers significant opportunity for this group, as most are at the stage where they can begin construction once capital is obtained.
The compelling SMP story has not gone away; in fact, it is strengthened as the global situation has increased the demand for additional green and ethical potash today, which is a gap the SMP sector is more than capable of filling.
I can see two scenarios unfolding over the next several years. The first is that the events of 2022 are world-changing to the potash business, and that over the next five to 10 years, the ethical potash gap is created as buyers shift from suppliers of conflict potash to greener, friendlier, and more ethical suppliers, which roots itself as a major market force.
The second scenario is that despite these events, potash buyers remain capitalists and rely upon price as the sole determinant for making a purchase. Therefore, the current price spike is an anomalous event driven more by fear and uncertainty than market dynamics. Furthermore, high prices induce demand destruction in the market, and overall sales volumes fall, which may be already occurring. Overall, while there will be some moral shifting in terms of buying patterns, over time this will abate.
Which scenario will play out? I believe that the CEO of each potash producer across the globe is looking at the above scenarios and trying to make a rational choice amidst the fog of war and uncertainty. Would I bet that the events of 2022 have permanently restructured the long-established industry network of buyers and sellers, and so I should make a big spend on new expansions, or is this an aberration, a black swan event that I must disregard and thus stay the course? A bad bet either way could be catastrophic to a company, resulting in either idled new capacity or loss of a unique opportunity.
Anybody got a coin I can borrow and flip?
‘Nuff said …