It ain’t over ‘til it’s over, as the 1991 song put it so eloquently. And that might be applied to the apparent patch-up of relations between Uralkali and Belarusian Potash Corp.
It is has been widely assumed that the potash industry has righted itself, that the Russians and the Belarus parties have papered over the cracks and their cartel is about to be back in full swing. Not so fast, according to one figure in the potash industry who did not want to be named.
Looking at the situation from those wanting to get into the market, the source close to the industry said it would take months, maybe as long as until August and September, to get the Uralkali/BPC cartel back in operation. Since Uralkali walked away, BPC itself has done some sales at the low end of the price range plus opened up new warehouses of its own in several territories, including Turkey and some of the other former Soviet republics.
The key will be get both former partners in the cartel to abandon their recent moves to volume-over-price and switch back to price-over-volume as a policy. Without that, the damage done to potash prices will just continue.
The other thing to watch is the benchmark price being settled in sales to China. While there has been some talk of sub-$300/tonne, this industry figures believes that contracts will be settled in the $300-$320 range (which will see sighs of relief throughout the potash sector). India may be back in play after the upcoming elections in that country if the new government reverses the cuts in fertilizer subsidies. Yields in India — and, remember, this country is going to overtake China in population and will have hundreds of millions more mouths to feed — are dropping; much urea fertilizer is being used but farms need potash for yield improvements and root development.
However, the other factor to be taken into account is that many in the industry believe the coming growing season will be a good one for potash. The extremities of hot and cold weather in various parts of the world have hit crops hard; yet, at the same time, farmers — particularly in developed countries — have been doing well and so have money to spend on fertilizer.
But there are projects and then there are other projects. Our industry expert clearly does not think prices are going back to a level we saw them at a few years ago because he says the ones to get the nod will need to satisfy three conditions: one, they have low cost economics; two, they must have a significantly-sized reserve; and, three, the geography has to be right in terms of being close to markets to keep freight costs down.
Even then there is another hurdle: a continuing reluctance by commercial (especially) banks to finance projects that require capital spending in the billions of dollars (and even more reluctance if they are located in a problematic jurisdiction).
Meanwhile, as was noted in a post on Investor Intel last week from The Australian newspaper, the view in Australia is that the apparent end to the potash war between Russia and Belarus in the dying days of 2013 is set to aid BHP Billiton’s search for a partner in its $15 billion Jansen potash project in Saskatchewan. This may be a little premature.
This belief is predicated on prices rebounding — but, given the reservations expressed above about a quick fix to the price, it may be that any potential partners will want to see evidence of not only a price bounce but a sustained one, at that.
The other factor that could well put a dampener on prices is continuing capacity expansion. K+S is developing its Saskatchewan mine, and in Russia both Uralkali and EuroChem are in expansion mode. China is encouraging potash production in several countries, including Cambodia and Laos.