Investors’ fear and concerns putting pressure on potash prices
Potash and Phosphate Month in Review: The ProEdgeWire Potash and Phosphate Sponsors’ index for the month of June fell by -12.51%, perhaps the single largest month to month drop in a year. EPM Mining Ventures (TSXV: EPK | OTCQX: EPKMF) was the only one to see some gains, +7.23% on the OTCQX exchange. EPM’s project is perceived as having a lower risk profile thanks to its partnership with India’s Tata Chemicals and an advantage in gaining access to the Indian market, where potash demand could rise quickly should there be a change in the government’s agricultural subsidies policy. Nevertheless, in June, the falling market valuations fell for juniors and majors alike, though in the former case the drops were not as dramatic (that is closer to 5% than 20%, or more, drops). Even PotashCorp fell by some 4% in June despite credible claims from CEO, Bill Doyle, that potash prices would rise in the third-quarter, edging toward the USD$ 470/ton mark in Southeast Asia and USD$ 450/ton in Brazil.
There can be only one general explanation to account for the ‘reluctant’ performance of potash companies: fear and concern in the commodities sector. Indeed, commodities have lost ground since 2011, making such items as potash extremely sensitive to the slightest hint of unfavorable news while leaving investors blind to favorable developments such as IC Potash’s (TSX: ICP) published resource upgrades or analyst ratings and Allana Potash’s (TSX: AAA | OTCQX: ALLRF) 85% increased mineral Resources and in the potash sector. There is a perception of low demand, even as actual demand as noted by increased exports and growing markets (i.e. Brazil) defies it. Perhaps, the potash sector is suffering, as in the case of so many other commodities, a ‘hangover’ after the excess of 2010 when giant BHP Billiton was willing to spend the sum of approximately USD$ 39 billion for Potash Corp in Saskatchewan.
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Meanwhile, BHP Billiton’s massive Jansen Mine (it would be the world’s largest potash mine) project remains in corporate limbo. BHP’s board has not yet approved the project but the latest musings from CEO Andrew Mackenzie suggest the Company is edging closer to shelving the project. BHP’s entry into the potash market was seen as a threat because of a potential oversupply and because of its challenge to CANPOTEX cartel pricing policies. Now, EuroChem, a Russian potash company controlled by billionaire Andrei Melnichenko, could end up reaching production at its Verkhne-kamskoye deposit faster than BHP’s most optimistic projections for the Jansen mine. Therefore, the rumors of a possible termination of BHP’s potash foray, and their potential bullish effect on potash prices, were ‘undermined’ by new Russian entries. As a result, potash investments have fallen under greater scrutiny in order to address the continuing perceptions of over capacity, symptomatic of the crisis-like changes in the environment with which potash producers have to deal with, marked by huge initial investment costs. Nevertheless, the long-term prospects for the industry remain quite attractive.
Arable land is shrinking and the only way to address the undeniable phenomenon of rapidly increasing population is by increasing the use of fertilizers; potash as an important raw material for fertilizer plays an important role in this long term prospect. For potash prices to recover anywhere near the highs of just a few years ago, concerns about production capacity and market demand must be addressed or at least clarified. Perhaps, such clarifications may come as early as BHP announces its final decision on the Jansen project. Incidentally, BHP’s decision, regardless of direction could have positive effects. If BHP decides to abandon Jansen, it would help quell overcapacity concerns; if BHP decides to move ahead, it would send a signal to the market that BHP expects a better economic situation, which would have a bullish effect. Meanwhile, in June, there were signs of optimism. Potash delivery volumes increased and even if buyers are maintaining pressure, spot prices have been rising and demand in China and Brazil increasing.