INSIGHT: Potash market in further chaos after Uralkali CEO arrest

02 September 2013 17:31  [Source: ICIS news]

By Deepika Thapliyal

LONDON (ICIS)--The arrest of Uralkali CEO Vladislav Baumgertner in Belarus has not only triggered a diplomatic row between Moscow and Minsk, but also raised questions about how many potash producers will be able to weather this storm.

The arrest (on 26 August) came less than a month after Baumgertner announced his company’s decision to part ways with Belarus’ Belaruskali. The split came eight years after Uralkali and Belaruskali formed a joint venture marketing company, or cartel, Belarusian Potash Company (BPC), to sell potash offshore.

The recent developments are bad news for a market which was under pressure due to general lack of demand.

“This is like the crash of 2009. No one is sure what’s coming next,” an official at a potash production company said.

Potash prices have tumbled by 15-20%, or $50-80/tonne (€38-61/tonne), in some markets such as southeast Asia and Latin America since the breakup of the cartel and are still trying to find a floor.

There are indications that prices could retreat further as buyers are absent from the market given the uncertainty about future direction.

“I have no idea about potash now. I want to buy but the question is how much is the price now and what the price will be in the future. So I will wait until the fog clears,” a southeast-Asia based buyer said.

This buyer’s sentiments are echoed by others across the globe including in the Americas, Europe and other parts of Asia.

In Indonesia and Malaysia, the price of standard grade muriate of potash (MOP) has declined by at least 10-15% since the end of July when the Uralkali/Belaruskali cartel split was announced, to $370-375/tonne cost and freight (CFR).

Also the depreciation of local currencies against the dollar in southeast Asia and India has reduced importers’ purchasing power, and in some markets in southeast Asia local material is less expensive than foreign product.

In Indonesia, buyers say the local price of standard grade MOP is $25-30/tonne lower, (at $340-350/tonne CFR equivalent) than the imported price, partly helped by the foreign exchange differential. But even at these levels, there is little or no demand.

In other major import markets such as China and India, buyers share similar sentiments.

The Chinese are yet to sign import contracts for the second half of the year. Negotiations were due to begin this month, but the arrest of the Uralkali CEO in Minsk has led to expectations that importers will delay signing fresh contracts even further unless the situation stabilises.

Chinese buyers are asking for a price discount of $100/tonne to $300/tonne CFR, compared to the first half 2013 price of $400/tonne CFR.

In India, which has already signed contracts for the current fiscal year ending March 2014, there have no new shipments heard over the past month.

Indian buyers have begun renegotiating contracts and are asking for a $67-77/tonne discount to $350-360/tonne CFR on the current price of $427/tonne CFR.

According to some sources, Belaruskali has already agreed to lower prices for MOP shipments after September. If this is true, other suppliers such as Uralkali and Canpotex will have no option but to follow suit, and this would further have ramifications for other markets such as China and Brazil.

Decreasing potash prices are good news for farmers and could even spur a pick up in demand over time, but this will be gradual.

In the immediate future, recent developments have cast doubts over the existence of another marketing cartel – Canpotex – which is made up of three North American potash producers, namely Potash Corporation of Saskatchewan (PCS), Mosaic and Agrium.

While members of Canpotex have assured investors that there will be no changes in the company’s shareholding, there is some speculation that freeing up of the market may make it difficult for cartels to exist at all. However, these assumptions are still premature as it is not clear which way the market is headed.

Also, producers - especially high-cost producers - will see their bottom line taking a significant hit with prices softening.

“300 [$/tonne CFR] is a sensitive number for many potash companies. It will drastically narrow profits and maybe some (producers) may just manage to break even,” the official at the potash company said.

Producers are already preparing themselves for a few tough years ahead.

Germany’s K+S plans a cost-cutting programme because of uncertainty in the market. The producer’s second-quarter adjusted group earnings dropped 25% from the prior year mainly due to lower sales and prices for potash. K+S has, however, clarified that it remains committed to its Legacy project in Saskatchewan.

Belaruskali as of late last week suspended operations at two of its four potash mines. While the official version is that the mines are undergoing maintenance, it is clear that the shutdowns are aimed at lowering supply and aiding prices.

As for new players in the market, smaller/newer developers that have limited capital-raising opportunities may find it difficult to remain afloat given tougher competition in the sector and a possible supply glut.

However, larger companies like BHP have maintained their commitment to potash, although the miner has delayed the start up date of its Jansen mine in Saskatchewan by around five years to 2020 at the earliest.

Last month, BHP Billiton announced plans to invest $2.6bn into the Jansen potash project. The mine will be the world’s largest having a capacity of around 10m tonnes/year once fully operational, with an estimated lifecycle of  more than 50 years.

In the past there has been speculation that BHP may abandon its potash plans because of sector headwinds.

So is there any recovery in sight for potash prices?

While no one has the answer on where prices are headed, any recovery in the near future does not seem likely.

“Everyone will grab whatever is in the market if there is some certainty that the price will go up next one month, say by $50-80/tonne. But no one thinks that will happen for some time now because there is no demand and a lot of supply in the market,” said the southeast Asia-based buyer.

Last month, Uralkali said it was ramping up production to 100% from about 70% previously. The producer has been vocal about pursing a volume over price strategy since it has one of the lowest costs for producing potash in the world.

The Uralkali CEO’s arrest has yet again raised questions about the company’s future sales strategy, but of one thing market participants are sure - the dynamics of the sector will never be the same again as the industry takes its first free market steps.

Read Paul Hodges’ Chemicals and the Economy blog
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By: Deepika Thapliyal
+44 208 652 3214

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