Lack of potash demand is ‘the real problem’: Canadian analyst

20 August 2013 16:49  [Source: ICIS news]

TORONTO (ICIS)--Lacking demand growth is the real issue facing the global potash industry, a Canadian analyst said on Tuesday in commenting on the turmoil caused by the break-up of the Russian/Belarusian export marketing group.

Fai Lee, equity analyst at Vancouver-based investment firm Odlum Brown, said that while the announcement last month of the Uralkali/Belaruskali break-up prompted a sharp decline in valuations of global potash producers, it was important to focus on the market fundamentals.

“Specifically, global potash demand has not grown as expected, which is creating a number of issues for the industry,” Lee said.

While potash industry capacity grew by 10m tonnes/year from 2007-2013 to an expected 66m tonnes/year by the end of 2013, global potash demand has not kept pace, Lee said.

“Through this six-year period, potash demand was dampened by uncertainty arising from the [2008/2009] ‘Great Recession’, tepid economic conditions globally, protracted purchase contract negotiations with major buyers in China and India, and a major reduction in fertilizer subsidies in India,” the analyst said.

As a result, potash demand in 2013 is expected to be at almost the same level as in 2007, when it was around 56m tonnes/year, he said.

Lee said that the recent dispute between Uralkali and Belaruskali could be viewed as “simply a symptom of the lack of global potash demand growth, which likely has encouraged Belaruskali to make potash shipments outside of its formal arrangement with Uralkali.”

If global potash demand had actually grown at its average expected rate of 3% annually from 2007-2013, global potash demand in 2013 would be about 66m tonnes/year instead of the current estimate of 56m tonnes/year, he said.

“In other words, potash market conditions would be fairly tight under this scenario rather than oversupplied,” Lee said.

Going forward, Lee forecast a “modest demand growth scenario”, supported by world population growth and continued economic growth in developing countries, including China and India.

“In our opinion, many of the issues currently facing the potash industry could be easily resolved by modest demand growth over time,” he said.

“For example, more demand would lead to higher utilisation rates and higher potash prices, and existing excess supply could be absorbed and new capacity additions would be required in the future to keep the market in balance,” he said.

As such, the volatility in potash valuations created opportunities for long-term investors, he said. He advised investors to be “opportunistic” in adding to their portfolio positions over the next few months.

In related news on Tuesday, Anglo-Australian mining major BHP Billiton said that it would continue to invest in its Jansen potash mining project in Canada’s Saskatchewan province.

Jansen is “the world’s best undeveloped potash resource, capable of supporting a mine with annual capacity of 10m tonnes for more than 50 years”, according to BHP.


By: Stefan Baumgarten
+1 713 525 2653



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