RESPEC’s take on the current potash market

RESPEC’STAkEONThE CuRRENTPOTASh MARkET

By debashi das, resPec engineer

the potash retail price is nearing an unsurpassed high of $896 USD per tonne, which was set in November 2008. The average retail price was at $878 USD per tonne in the third week of May 2022, which was twice as expensive as the same time last year. Unlike previous price run-ups, are these prices sustainable, especially when the market continues to be at an unprecedented high level? The answer is yes, the prices will further increase from the current levels in the short term (approximately 12 months) before consolidating to a significantly higher level in the medium and long term.

Several factors contribute to the recent run-up of prices; however, the most significant factor is the tight supply/ demand balance in the potash market, which is expected to tighten further in the short term. An easy solution to the conflict in Ukraine does not seem to exist, and the sanctions on Russia and Belarus—the world’s second- and third-largest producers of potash—do not appear to be lifting soon.

The potash production in Russia and Belarus in 2022 is expected to reduce to almost half of their production in 2021, which will create a supply deficiency of nearly 11 million tonnes. Nutrien and other major producers of potash in Canada are aiming to increase production by 4.4 million tonnes at most, which still leaves a major supply/demand crunch. Beginning in 2026, the BHP Jansen

Mine is planning to produce 4.8 million tonnes per year of potash in Stage 1. No other project is scheduled for the short term.

If the sanctions on Russia and Belarus are lifted soon, the three potash mines that were shut down in Russia since the conflict will not be readily operational because of poor upkeep and lack of maintenance of the mines.

Another factor contributing to the volatility in prices is the global grain and oilseed stocks-to-use ratio. The global grain stocks-to-use ratio and the global oilseed stocks-to-use ratio in 2021 and 2022 have been the lowest since 2007 and 2008, and 2015 and 2016, respectively. The low ratios increase sensitivity to supply/demand shocks and favour increasing demand for fertilizers to increase grain and oilseed production.

Potash producers might not be able to sell potash at a higher price because of the farmers’ unwillingness to pay higher price for fertilizers. Inflation and supply chain constraints caused by COVID 19, however, has enabled farmers to sell crops at a higher price, which outweighs the increases in input costs. The United States corn growers’ cash margin, for example, has been the highest since 2012, as shown in the following figure. Therefore, farmers are willing, now more than ever, to pay a higher price to source fertilizer.

Supply chain constraints can also play a key role in further tightening the supply/demand balance and increasing the prices. In Canada, the majority of the potash is transported to the Port of Vancouver by two rail providers—Canadian National (CN) and Canadian Pacific (CP). Work stopped for two days when 3,000 CP employees went on a strike to demand a bargaining agreement. The situation was resolved, but it highlighted the vulnerability of the potash supply chain logistics and overreliance on rail to transport fertilizer from the mine to the port.

The current potash price cycle is different from previous cycles, and potash prices will remain significantly high in the short term because of tight supply demand balances. The prices will consolidate at a higher level in the long term because the long-term market fundamentals support an upward shift in mid-cycle crop and fertilizer prices. Exploration activities and financial investments have ramped up significantly, as they did in 2008; coupled with the increased activity in the oil and gas sector, this increase has caused challenges with securing equipment to conduct exploration work. Investment in small, North American projects has also created a lot of interest and RESPEC

is grateful to be working with several junior exploration companies again. l

potash

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