Participants in the global potash market have endured a difficult first half of the year, with delays to contract negotiations, low demand, high stocks and falling prices.
Sales volumes for the top eight producers declined by 2.6 million t during January – June this year compared with the first six months of 2015.
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"A balancing act"
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Numerous producers referred to the market being in suspended mode from March to July in lieu of the benchmark China and India contract settlements. But with both regions fully settled by August, the market is expected to enjoy a period of contentment.
That is until Chinese negotiations begin again from early 2017, curtailed production starts back up and new capacity comes on line.
Without the anchoring force of Chinese and Indian contract prices early in the year, producers were forced to place tonnes in alternative markets. As such, spot buying regions, such as Brazil, Malaysia and Indonesia, drove down the price of both granular and standard grade potash.
The US, Brazil and Europe were targeted to take up the slack when Chinese and Indian contract deliveries halted as delays to new contracts stalled. While European prices held up remarkably well, the US became the most cheaply priced market in the world as North American producers struggled to place tonnes and inventories at warehouses grew. US import demand during the first half of the year fell well below 2015 levels, with the first uptick in year-on-year imports coming only in July.
Brazilian demand was a high-point in the market, with a rise in imports of granular product, despite the country struggling against a depreciating currency, credit issues and wider political instability.
Finally in June, following months of uncertainty over Chinese contract settlements, Indian buyers wary of the upcoming kharif season moved first, securing contract deliveries from 1 July 2016 until March 2017 at US$227/t CFR (cost & freight). Lead negotiator Indian Potash Ltd (IPL) struck the deal with the Belarusian Potash Co. (BPC). IPL and BPC signed a five year supply deal from 2016 – 2020, announced in January 2016, but with no volumes or prices.
Despite calls for greater producer discipline, the Indian negotiations showed divergence, with Canpotex, the North American export arm of PotashCorp (PCS), Agrium and Mosaic, unwilling to officially announce its commitments to India. The legal cartel was understood to be reluctant to accept the price of US$227/t CFR and would only agree deliveries for 3 – 6 months, with it expected to attempt to renegotiate prices at the end of that period.
Total tonnes agreed to Indian buyers so far according to ICIS data is around 3.3 million t. However, as above, Canpotex is understood to have only committed tonnes until December, while Uralkali will deliver tonnes until July 2017.During the last contract period with India, (officially April 2015 – March 2016, but including June with carryover tonnes) BPC delivered 1.3 million t, Uralkali 1 million t and Canpotex 0.9 million t, with the total imports at 4.4 million t, according to ICIS data.
Following the settlement of Indian contracts, BPC was again first to reach an agreement with the Chinese buying consortium of Sinochem Fertilizer Macao Commercial Offshore Ltd (Sinofert), China National Agriculture Means of Production Group (CNAMPGC) and China National Offshore Oil Corporation (CNOOC) at US$219/t CFR China. BPC and CNAAMPGC have a memorandum of cooperation from 2016 – 2020.
At the time of settlement in mid-July, BPC Director General Elena Kudryavets said: “The deal with China logically arises from the contract with India being previously entered into, and we are confident that the Chinese deal will contribute to stabilising the global potash market and secure its upward advance.” “This price level reflects the actual market situation and the trends prevailing in the global potash market,” Kudryavets added.
BPC is expected to ship around 1.3 million t to China by the end of 2016, under the new contract deal.
As with Indian contracts, Canpotex has not disclosed its commitments to China for the current period. Its 2015 shipments were expected to be at least 1.8 million t. Canpotex has a MoU with Sinofert from January 2015 to December 2017, with a minimum of 1.9 million t of standard red MOP to be delivered across the period, and 2.4 million t optional of other grades with prices to be negotiated every six months.
Israel Chemical Co. (ICL) will supply around 700 000 t to China for the remainder of 2016. ICL announced in January it had agreed to supply 1.1 million t in 2016, as part of a deal spanning from 2016 – 2018. Volumes in 2017 are 1.14 million and 1.16 million in 2018.
Uralkali concluded Chinese supply contracts for 600 000 t for delivery from August 2016 – January 2017.
Arab Potash Co. (APC) and Sinofert had agreed for 600 000 tpy from 2014 – 2016, with Sinofert the exclusive channel for all APC sales. No new deal has been announced yet.
Following the settlement of contracts and the resumption of deliveries of major tonnes, the market received a boost in news of delays to the start-up of the K+S Legacy mine in Canada from the expected start-up in late 2016 to the second quarter of 2017.
In July, a process vessel became detached from its mounting during a routine test and fell to the floor causing considerable damage. While commissioning on Legacy went ahead in August, production will be below the expected volume of up to 1 million t in the course of the delayed start-up period next year. Despite this, K+S is still assuming it will be able to reach its target production capacity of 2 million t at the end of 2017.
The delays to K+S certainly lifted sentiment, following months of curtailments and idling of production at PCS and Mosaic’s Canadian mines.
PCS, the largest of the North Americans producers, announced in January the indefinite suspension of its operations at Picadilly in New Brunswick, Canada. The Picadilly mine is the newest PCS mine, costing CAN$2.2 billion, but it had the most expensive per tonne cash costs due to its geology. Picadilly was expected to ramp up to a capacity of 1.1 million t in 2015, with the nearby Penobsquis mine to run in tandem during the Picadilly ramp-up. However, decommissioning at Penobsquis was bought forward to the end of November 2016.
PCS President and CEO Jochen Tilk said in an investor conference in Canada in January, that in 2007 when investment began at the Picadilly mine, expectations for annual potash demand in 2015 were around 70 million t, however demand last year came in at 59 million t.
“In a commodity business in a difficult time, you consolidate, you rationalise and you optimise,” Tilk said in July.
At the investor conference, Tilk said production would be focussed on PCS' lowest costs mines where cash costs are around US$40/t. However, he was unwilling to divulge the costs of Picadilly.
Mosaic followed suit in announcing cutbacks, with its 2.6 million t capacity Colonsay mine idled in July.
Mosaic said its lower-cost mines of Esterhazy and Belle Plaine, in combination with inventory, would allow it to meet the short-term supply needs.
The shuttering of the Colonsay mine followed lower production from Uralkali in Russia, with its Q2 production at 2.5 million t, down from 3 million t in 2Q15. Its H1 production was at 5.1 million t, compared with 1H15 at 5.7 million t. BPC also reduced production to around 70% of capacity.
Meanwhile, Agrium had been busy increasing its capacity, with it completing the Canpotex proving run for the 1 million t production expansion at its Vanscoy potash facility in Saskatchewan in December 2015.
The enhanced facility now has an annual nameplate capacity of 3.024 million t and the producer said it expects its Canpotex allotment to be approximately 10.5% of the organisation’s total international shipments in 2016.
Canpotex said in February it would reduce January-June export volumes by at least 1.5 million t and also flagged the possibility of further reductions to sales volumes in 2H16.
Canpotex decided in June not to proceed with the construction of a new export terminal at the Port of Prince Rupert in British Columbia. With it set to rely on its terminals in Vancouver, Saint John and Portland, Oregon. The facility was expected to cost CAN$775 million (US$602 million) and was initially expected to be operational in 2012.
US-based Intrepid Potash idled operations at its New Mexico-based West facility and transitioned the facility to care-and-maintenance mode in July. The West mine generated 42% of Intrepid’s potash production in 2015 and has a capacity of around 380 000 tpy.
Germany’s K+S did not make any cutbacks due to prices, however, the producer struggled to operate at full capacity at a number of its sites due to saline wastewater disposal issues.
K+S said in July its Unterbreizbach site had resumed operation, but continuing operations were not guaranteed. At its Werra site, production is also being affected by saline wastewater issues and available basin capacities. At the Hattorf site, production remains suspended since June, due to similar issues. Only K+S’ Wintershall site has not been affected by production shutdowns.
With delays to the start of production at K+S’s Legacy mine, sentiment was further bolstered in August when BHP Billiton signalled it may shelve its Canada-based Jansen project if the outlook for potash does not improve. It said while the two shafts will be completed sometime in 2018 or 2019, the board will then decide whether to build the mine, despite US$2.6 billion spent in development. BHP has previously said it was open to having a partner on the project, but shareholder sentiment is tending towards moth-balling the mine. In mid-August, Jansen was at 60% completion. The project was at 54% complete at the end of 2015. Its current investment is to finish the excavation and lining of the production and service shafts and to continue the installation of essential surface infrastructure and utilities.
However, capacity increases and a more aggressive strategy was emerging from the CIS region, with Uralkali moving towards a delisting from the Moscow Stock Exchange and new capacity from EuroChem expected in 2017, while BPC continued to build its new mines.
In early September, Uralkali reduced its free float shares on the Moscow exchange via its buyback programme to about 6.5% of the company’s capital. Under the exchange listing rules, if a free float remains below 7.5% for six consecutive months the share will be excluded from the level 1 ‘blue chip’ quotation list.
The expected delisting on the Moscow Exchange could be a prelude to a merger with Uralchem, which already owns 20% of Uralkali’s shares.
Despite the possibility of a tie-up of the Russian majors of Uralkali and Uralchem, moves are still afoot to return Uralkali and BPC to a partnership. Other Uralkali major shareholder Onexim sold its 20% stake to Belarusian businessman Dmitri Lobyak in July. The sale came shortly after Belarus’ president Alexander Lukashenko suggested agreement between Belaruskali and Uralkali could happen again.
Lukashenko said in June: “Virtually every month new shareholders of Uralkali contact me to say that they want to cooperate.”
“Let’s agree on the volumes of production.”
“To put it plainly, we will divide markets and will not compete with each other.”
Fellow Russian fertilizer producer EuroChem is working towards bringing its two projects with a capacity of 8.3 million t online in the coming years. However, there is some speculation in the market that tonnes from the Gremyachinskoe deposit and at the Verkhnekamskoe deposit could be available in late 2017.
Adding further to the mix, construction began in 2015 on BPC’s Nezhinsky mine. The facility, near Lyuban, is expected to start production by 2020, with a 2 million tpy capacity.
While BPC would have full export rights on the output, the complex is being built by Russian billionaire Mikhail Gutseriev’s Slavkaliy company using financing sourced from China.
If the complex – set to be Belarus’ third largest – achieved its goal of producing 2 million tpy of the crop nutrient, Belarus’ potash production would increase to 14 million tpy, BPC said.
Further west, the only permanent reduction was noted by ICL, when it announced in August that it is moving ahead with its transition to polyhaliate production. It plans to accelerate the transition from potash production at its Cleveland (Boulby) mine in the UK to producing polysulphate (polyhalite) due to poor conditions in the potash market.
In 2016 alone, ICIS partner Integer estimates the spare capacity in the industry to be more than 12 million t.
Meanwhile the freshly announced merger between PCS and Agrium will see the new company control 19 million tpy of potash capacity, with 22 million tpy available when planned expansions are complete. However, the tie-up is not expected to have the impact on the market like the breakup of BPC and Uralkali. PCS, already the largest producer by capacity at 16.1 million tpy, will see an additional 3 million t of capacity from Agrium’s Vanscoy mine. By comparison, Russia's Uralkali will have annual capacity of around 11.8 million tpy by the end of 2016.
In announcing the deal, executives said potash would be taken from the lowest cost mines, but expected cost savings in the merger would not come from shutting mines.
The pair also confirmed their commitment to Canpotex, maintaining they do not anticipate any changes to the structure of the company now or after the merger. Commenting on the structure of Canpotex with Mosaic after the expected merger, Tilk said in September: “We expect it to be an equal fair and functional partnership. I don’t think there’s been a disagreement in 40 years, we’ve been very well aligned.”
While the second-half of 2016 may continue to see improvement in prices and outlook, 2017 and beyond is expected to be far from balanced.
This article was written by Kate Wilcock, ICIS, UK, and is taken from the November issue of World Fertilizer. To register and read the full issue, click here.
Read the article online at: https://www.worldfertilizer.com/special-reports/30122016/a-balancing-act/