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Undaunted by glut, new potash players bank on fertilizer rebound

(Photo courtesy Agrium)

New York | Reuters — The owners of several new potash mines that are adding fertilizer to an already oversupplied market are banking on better times, bucking industry thinking that the projects may snuff a modest price recovery.

The drive to build new mines began when potash prices were higher, but last year prices slid to nine-year lows. BHP Billiton caused a further chill among miners on Tuesday when it outlined tentative plans to start production in 2023 at its Jansen site in Saskatchewan.

Privately held fertilizer producer EuroChem Group plans to produce 1.1 million tonnes of potash in 2018 from its two new Russian mines and increase output steadily over six years, but it will be “rational” amid concerns about a supply glut, chief financial officer Andrey Ilyin said on Wednesday.

Output capacity will reach 8.3 million tonnes annually by 2024 or 2025.

“We think that our product is not going to be a big disruption for the market in the near term,” Ilyin told Reuters on the sidelines of BMO’s Farm to Market conference in New York. “As anybody who is long potash, we are very mindful of what effect we might have on the global supply-demand balance.”

The company will also make its production decisions taking into account rivals’ actions and the pace of sales growth, he said.

“All of these things in combination will basically determine our behavior, which I’m sure will be very rational in the economic sense,” Ilyin said.

The surplus capacity of potash, also known as potassium, over demand is 16.6 million tonnes this year and may climb to 18.4 million tonnes in 2018, according to BMO.

“We see little support for a bullish or even neutral view on potash,” said Scotiabank analyst Ben Isaacson, in a May 9 note.

Demand, however, remains strong and it is possible that new supplies will push out higher-cost producers, said Gertjan van der Geer, a senior investment manager at Pictet Asset Management, which manages shares of potash majors PotashCorp and Mosaic Co.

“It’s a concern, but I’m also not sure if it’s going to get worse from here,” he said. “Today, it looks quite difficult with all that capacity coming on.”

Ilyin said EuroChem is more confident in the industry’s future than some analysts because the small number of potash producers makes it possible to curtail production as needed.

BHP expects prices to fall further in the near term, but is focused on a longer time period, said spokeswoman Bronwyn Wilkinson. Annual compound demand growth of two to three per cent will absorb most of the new capacity during the next decade, while some high-cost competitors may face pressure, so the market may be recovering once BHP starts producing in 2023, Wilkinson said.

K+S AG, which opened a Canadian mine this month, could not immediately comment, a spokeswoman said.

One start-up is trying a more specialized approach. Sirius Minerals PLC started construction in May on a United Kingdom mine that will produce polyhalite ore that includes potassium and several other nutrients.

Even so, the gloom around the potash glut overshadows its product, called polyhalite, CEO Chris Fraser said.

“It shouldn’t but it does. Everyone’s (potash) is the same as everyone else’s. This is a value-added specialty.”

— Rod Nickel is a Reuters correspondent covering the agriculture and mining sectors, based in Winnipeg.

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