When Stars Align: Part 2

Phosphate

Prospects for the phosphate fertilizer sector have firmed up recently due to increased demand and reduced supply. China’s soils are deficient in phosphate and, for several decades, the government has prioritised domestic production; output of phosphoric acid, for instance, stood at 18 million t in 2016, approximately 45% of global production.

As previously reported in World Fertilizer (March, 2018), most of China’s phosphate fertilizer production is in four provinces: Hubei, Sichuan, Guizhou, and Yunnan, close to the country’s phosphate rock resources in southern China. A host of marginal exporters have been operating on increasingly thin margins; some have been forced to curtail production, while other plants have continued to operate on zero profits to keep employment up and stave off potentially adverse socio-economic effects. Chinese phosphate exports have remained relatively high at approximately 6 million t in 2016 and 2017. Recently, the government, in an effort to improve the environment, has been ordering the closure of older, polluting facilities. This comes as export tariffs and subsidies are curtailed. According to China Phosphate Industry Association, approximately 3 million t of P2 O5 capacity will be closed permanently during 2015 – 2020, with the concurrent decline in exports.

North America has a 8.8 million tpy phosphoric acid plant capacity. The US has the majority, approximately 8.5 million tpy, mostly located in Florida. Nutrien, JR Simplot, and Mosaic are major producers. Nutrien has the sole Canadian production, a 345 000 tpy plant located in Alberta.

North America’s economically recoverable phosphate rock reserves are depleting, however. Phosphate rock integration is a vital component in downstream profitability. Over the decade, several sources have been shuttered, including the closure of approximately 2 million tpy phosphates capacity at Mosaic’s Plant City, Florida, in late 2017.Russia has low-cost producers with rock integration and inexpensive natural gas. Ma’aden in Saudi Arabia also benefits from these advantages. North African producers OCP and GCT have significant economies of scale in phosphate rock production.

Recent major expansions have encountered delays, however. The Ma’aden Wa’ad al Shamal Phosphate Company (MWSPC) joint venture in Saudi Arabia was slow to ramp up to its 2 million tpy capacity after opening in 2017. The Jorf Phosphate Hubs 3 & 4 (JPH 3 & JPH 4) in Morocco also faced delays and slower ramp-ups.

Demand is also picking up. Analysts estimated that growth of DAP/MAP/TSP/NPS grew at an annualised compound rate of 1.6% in the first half of the decade, then picked up to 3%, thanks to increased usage in Asia and Brazil, resulting in 68.3 million t of production in 2017 and 70 million t in 2018.

As a result, the growth in demand for phosphate is out-stripping net growth in supply by over half a million tonnes, assuming that there is no change in Chinese exports. If Chinese exports decline, the short-fall will increase accordingly.

The change in fundamentals is already being seen in the bottom line. In 2Q18, Nutrien reported that its phosphate EBITDA increased 42% over the same period in 2017. It attributed the increase to higher phosphate fertilizer prices, as well as increased plant productivity and lower unit costs. Nutrien expects the phosphate price to remain strong in 2019.

Potash

Potash is experiencing strong demand at a time when new capacity is slow to ramp up, creating opportunities for low-cost producers. According to the USGS, Canada was the world’s largest potash producer in 2017 (12 million t), followed by Russia (7.2 million t), Belarus (6.4 million t), and China (6.2 million t). Canada has 35 million tpy capacity, mostly in the province of Saskatchewan. Nutrien is the dominant producer, with 20.6 million tpy capacity.

The potash sector in Canada has been going through a down-cycle trend of rationalising high-cost assets, consolidation, and postponing development of new capacity. In 2016, PotashCorp closed a mine in New Brunswick and cut more than 500 jobs at its Cory mine, west of Saskatoon. In late 2017, it also idled two mines for several months, reducing its annual production quota by 1 million t. In January, 2018, Agrium and PotashCorp formally merged, creating a combined company with 20.6 million tpy in potash capacity, and an extensive retail network throughout North America.

Some new capacity has been added. In mid-2017, a K+S Bethune mine, located in Saskatchewan, came online. The CAN$4.1 billion facility, initiated in 2012 when commodity prices were higher, can produce up to 2 million tpy of low cost potash. Also in mid-2017, PotashCorp announced the successful expansion of its Rocanville underground mine, located 230 km east of Regina. The CAN$3 billion project took eight years to complete, and added 3.5 million t to the 3 million tpy nameplate capacity.BHP, however, suspended further major investments at its Jensen prospect in Saskatchewan. Since the mid-2000s, the company has spent almost US$4 billion sinking mine shafts. It is now waiting on an estimated US$10 billion in further capex.

Russia has several recently-completed potash projects. EuroChem built the Usolskiy plant in the Perm region and the Volgakaliy facility in the Volgograd region. The two facilities will have a combined capacity of 1.1 million tpy, and are expected to be fully operational in 2019, once flooding issues are rectified. In spite of being the world’s fourth largest producer, China is also the world’s largest importer of potash. Demand for potash is expected to rise significantly in the next several years. Recent mandatory testing of agricultural soils indicated significant stress, and the need to replace potassium in several jurisdictions is considered acute. In mid-2018, both China and India entered into contracts for long-term muriate of potash (MOP) imports. In August, 2018, Indian importer IPL inked a US$290/t CFR (cost and freight) contract with Belarusian Potash Company. China signed for the same amount in September, which represents a US$60 increase from the year before. When adding up growth in demand and delays in ramping up new supply capacity, potash producers are optimistic on the short term future. In mid-2018, Nutrien raised its 2018 global shipping estimate from 63 – 65 million t to 65 – 67 million t.

Challenges remain

In early 2018, the Trump administration imposed US$34 billion in tariffs on China as part of its war on trade deficits. In retaliation, China imposed countervailing tariffs of US$50 billion on American products. One of those products was soybeans, which depressed the price to US$8.50/bushel in July. In August, 2018, the Trump administration announced it would stump up to US$12 billion in aid for US farmers to shield them from the repercussions. The package includes government purchases of surplus agricultural products and direct compensation.

Analysts note that the aid package will further distort the market, emboldening US producers to continue planting soybeans in an over-supplied market. The US Department of Agriculture (USDA), announced a record 2018 crop of 4.6 billion bushels. Both Canada and the US are major soybean exporters to China; it is unclear how the ramifications of the tit-for-tat trade war will play out.

Looking further afield, several trends bode well for the sector. Demand in Asia and South America is expected to be strong over the next several years as countries professionalise their agricultural sectors. The growth in new production facilities has slowed and the shuttering of older, high-cost capacity plants has increased, bringing supply and demand closer to balance. And the world population continues to grow. Prospects for the next few years have producers smiling, for once in a very long time.

Read the article online at: https://www.worldfertilizer.com/special-reports/28122018/when-stars-align-part-2/