Potash Industry Update - Mosaic 2013 Q2 Earnings

Mosaic recently reported results for the second quarter of fiscal 2013 - the company will soon move to align its fiscal year with the calendar year - and the conference call featured some interesting comments about the potash industry.

The company remains bullish on the prospects of potash - and fertilizers in general - both in the long-term, and over the course of the next year.  Despite continuing politically-driven and currency-related problems in India, Mosaic expects a record, or near-record year of potash consumption, in part because net farm income is as high as it’s ever been, while fertilizer remains very affordable.  Indeed, the costs of fertilizer are as low as a percentage of crop prices as they've been in 10-15 years.

Mosaic outlined their medium-term assumptions for potash industry, as well.  Demand, management forecasts, will be 55-57 million tonnes for fiscal 2013, 59mmt for 2014, and rise to 63-64mmt for 2017.  Industry capacity, they believe, will be in mid-70mmt range, meaning that the industry will be operating at 85-90% capacity, which should be good for prices.

Significantly, CEO Jim Prokopanko strongly hinted that when the current MOU expires at the end of this year, Canpotex will discontinue its long-standing policy of selling to China and India on contracts, and begin selling instead on the spot market.  He noted that contracts were signed for a year in the past, were reduced to the present six month terms, and - wink, wink - said, "I think you can see the direction we're headed" (1).  This will make for a much smoother quarter-by-quarter business, and will likely also mean somewhat higher prices, but somewhat lower volumes.

Sources: (1) http://seekingalpha.com/article/1095101-the-mosaic-management-discusses-q2-2013-results-earnings-call-transcript

My analysis of Potash Corp is here.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

 

 

Canpotex Signs a Potash Contract with China

Canpotex recently agreed to sell 1 million tonnes of potash to China for $400 per tonne, significantly lower than the most recent deal, which set the price at $470.  At first glance, the move appears surprising.  After all, Canpotex maintains a religious policy of curtailing supply in periods of soft demand, which usually prevents prices from falling abruptly.  And the marketing body, which sells on behalf of Potash Corp, Mosaic and Agrium, has cut production significantly in recent months.  What's more, potash consumption in 2012 was as high - or nearly so - as it's ever been.  However, robust end-market use has not translated into mine production on a one-for-one basis over the past year, as many farmers and distributors have drawn down inventories, rather than purchasing additional product.

Though the price is lower, the deal will have some advantages for producers, both in the near-term, and over the long-term.  For one, it gets a significant amount of product moving.  In addition, it may prompt India to re-enter the market, which has been very difficult of late, largely due to domestic political forces.  Given that potash mining has significant fixed costs, there is also some merit in having a decent base load of product being sold.  Finally, it may also tighten up spot markets later in the year, which accounts for most of Canpotex's sales.

Still, all of these factors likely do not outweigh the price cut.  So what happened?  It's possible that Canpotex simply got outmaneuvered, or that the current supply/demand balance is tipped too far in favor of buyers.  But Canpotex may have forfeited a battle in order to win the war.  The most serious long-term threat to potash producers is the risk of oversupply.  Over the next year, BHP Billiton will decide whether to go forward with its potentially massive Jansen mine.  The project is expected to be very expensive, and cannot be justified unless potash prices are far higher than the present $400 per tonne.  To be sure, what matters most is where potash prices are seven or more years down the road, but it’s difficult to allocate $5 billion - and perhaps much more, in this case - without seeing prices rise and stay up for a period of time.  Only time will tell, but the reduced price may be enough to scare off new production, at least for a few more years.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

New Supply in the Potash Industry - The First Greenfield Mine In Four Decades

As discussed earlier, the most significant threat to incumbent potash producers is the potential of major new supplies of potash coming online, which would put downward pressure on both prices and profits.  However, the barriers to entry are very high: a capital cost of $4-5.5 billion, and many years before a greenfield mine reaches full production.

This week, German-based K+S AG broke ground on the first new potash mine in more than four decades (there have been expansions of existing mines, however).  The company, as a long-time producer of potash, has credibility that some other would-be producers lack.  For instance, K+S projects that it will take more than a decade to reach full production of 2.86 million tonnes/year, a much more realistic timeframe than is often cited.

However, the company announced a rather optimistic 2015 as their target date to begin producing at 1 million tonnes/year, and a capital expenditure of just $3.25 billion, significantly lower than most other estimates of the cost of bringing on new production.  Time may show that both of these estimates are too low.

The company also suggested that once in production, it's unlikely to sell its potash through the Canpotex marketing body, citing European anti-trust issues.  However, it reiterated its long-held philosophy of maximizing price, rather than the volume of tonnes sold, even if it requires restricting supply.

Overall, this new development should not cause investors in Potash Corp, Mosaic and Agrium to tremble.  The new capacity will be a long time coming.  And it's moderate in size, especially in the early years, which shouldn't cause significant pricing pressure.  Moreover, any pricing weakness will be counteracted by withholding supply.  However, the added production figures to be sizable enough to increase risks for other aspiring newcomers.  BHP's large Jansen project remains the wild card in the potash industry, but recent signs suggest the company will at least postpone a decision on the project.  If K+S's move was enough to give BHP pause, this week's announcement may actually turn out to be positive news for potash investors.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.