INSIGHT: Potash players adapt to new normal

Author: Andy Hemphill

2020/06/08

LONDON (ICIS)--Although the global fertilizer industry has endured the hardships and uncertainty thrown up by the unprecedented global pandemic better than most, there is no denying the impact of the coronavirus’ disruptive influence on muriate of potash (MOP) players.

With a global nameplate production capacity greater than 69m tonnes/year, and annual trade of approximately 53m tonnes, potash is one of the most-used stock fertilizers, trusted by agribusinesses worldwide.

Conversely, the greatest concentrations of the mineral fertilizer are found naturally in a very small number of countries, including Russia, Canada, Israel, Jordan, Germany and Belarus.

This dichotomy between great market size and the limited number of MOP majors worked in favour of the potash industry as the coronavirus spread across the globe, helping to alleviate the logistical difficulties faced by many other industries - and indeed, rival fertilizers.

BEFORE THE STORM
The global potash market was in a difficult position towards end of last year. and producers began publicly announcing cuts to production - a traditional response to a slower demand period.

That said, producers were a little too slow in curbing output, especially given the already high level of inventories in key importer Brazil, and as Chinese importers played the waiting game on their next long-term import contract.

This left the market somewhat long as 2020 approached - and as the coronavirus that first appeared in Wuhan, China began to spread, fast.

The general consensus - in those pre-pandemic times - was the potash market would remain inactive until March, at least.

Southeast Asian buyers were stalling purchasing decisions, awaiting news of a new bellwether China settlement, while in India, key importing companies tired of waiting for China, and instead settled their own six-month supply contract at $280/tonne CFR (cost & freight).

This was a $10/tonne decrease from the 2019 agreement, but only covered six months of 2020.

Soon after, the market began to show signs of recovery, as Indian buyers purchased cargoes, southeast Asian powerhouse PT Pupuk Indonesia snatched up large-volume tonnes - albeit low-priced material from Laos - and Brazilian warehouse draw increased.

But it was not to last. Values quickly slipped again, depressed by weak demand as nations awoke to the threat of the coronavirus in their midst. Civilian lockdowns, plant closures, port force majeures, workforce restrictions, and fluctuating exchange rates caused a month or more of unexpected disruption.

THE 'NEW NORMAL'
From the chaos came limited clarity for the potash trade. Most governments classified fertilizers as ‘essential goods’, which stripped away some of the logistical snags, and allowed improved transport of potash from mine to field.

This is also where the limited number of MOP majors played into the industry’s hand, as the likes of Russia and Belarus cut through red tape, and ensured the big-name players could keep trading with relative ease.

That left the industry with one key hurdle to overcome - the slow degradation of potash prices at points across the globe; which Belarus Potash Company (BPC) set out to nip in the bud with a surprising announcement.

On 30 April, BPC revealed it settled a contract with a consortium of Chinese buyers for the long-term supply of standard-grade MOP fertilizer in 2020, at a price point of $220/tonne cost and freight (CFR).

The agreement - a $70/tonne decline on the previous benchmark of $290/tonne CFR agreed for 2018-2019 - took many players by surprise, with one southeast Asian distributor describing the decrease as “amazing”, and beyond predictions.

Potential decreases of $30-50/tonne had been heard on the table for the key bellwether deal, but were proven to be too conservative.

Announcing the contract as “a vital step”, BPC said at the time: “The price of the new China contract builds a firm foundation for the stabilisation, recovery and further incremental development of the global potash market.”

Russian rival Uralkali was unimpressed, saying that: “the price agreed is not appropriate either for the length of that particular contract, or for the industry as a whole.

“Potash producers incur high investment costs to maintain existing production capacities and develop new deposits. This activity is necessary to meet the growing global demand for fertilizers."

And then, just two weeks after news of the Chinese benchmark deal, the global MOP market watched with interest as the Indian settlement arrived.

The six-month supply agreement finalised at $230/tonne CFR - a $50/tonne slide on the last agreement, and $10/tonne above China’s benchmark deal - further cementing “the basement of the market”, as one MOP major’s Latin American sales chief put it.

ONWARDS AND UPWARDS?
Now, as the third quarter of the year approaches, two schools of thought have developed in the global potash market.

The first views the China and India settlements as a useful jumping-off point for trade, and a secure bottom to the market in a time of uncertainty.

However, another view sees such a decline as undercutting the future stability of the potash industry, at a time when the world faces ambiguity ahead.

Indeed, this division and ambiguity has been reflected in pricing.

In southeast Asia, many palm oil plantations - notably in Malaysia - continue to delay potash applications; under the pressure of fluctuating crude palm oil (CPO) futures and returns.

Combined with the decline in China’s long-term agreement, this saw bids for both standard- and granular-grade potash drop abruptly; leaving producers little room to manoeuvre in talks.

Conversely, Brazilian demand has become increasingly healthier throughout 2020 - even though the threat of coronavirus-related disruption continues to loom large over the nation. Brazil’s reliance on trucks for transport could leave the market paralysed should drivers opt to remain home to preserve their family’s health.

MOP majors sold June and July cargoes at $230/tonne CFR, and have pushed up $10/tonne for August, September, and into October for offers.

That said, when compared to the highs seen in Brazilian granular pricing in 2019, sales into the Latin American powerhouse still have some way to go.

Overall, the potash market has withstood the trials of the coronavirus with relatively little disruption thus far - but no-one in the market is confident that there are not more difficulties ahead, especially with the potential spectre of second wave infections on the horizon.

INSIGHT by Andy Hemphill