EDITOR: | October 31st, 2013

Hopes grow that potash prices will firm, and maybe Uralkali will even get back together with Belaruskali

| October 31, 2013 | No Comments

rbpotashart1The exit of Uralkali from the Belarusian Potash Company marketing arrangement has had its repercussions as far afield as Canada. Well, the junior mining sector in particular. But if Humpty Dumpty was put back together again (and now there is growing speculation that will happen), then it might be the boost that not only the big potash producers need but a sign of hope for all the potash junior hopefuls.

Patricia Mohr of Scotiabank identifies the break-up of the potash deal as one of the two random events that have undermined the Canadian junior sector, the other being the Fukushima nuclear accident.

Just as the latter sent spot uranium prices from $66.50/lb just before the earthquake and tsunami to $34.7/lb now, so the Uralkali move has helped unsettle the potash market, and particularly shares in those companies in the process of proving up new mine projects.

Scotiabank’s monthly commodity notes says that equity raising by juniors on the Toronto Stock Exchange Venture board plunged in 2012, and still continues to decline. The TMX Market Intelligence Group indicates that equity capital raised for mining companies on the TSX Venture exchange has dropped from C$5.9 billion in 2011 to a “mere” C$2 billion in 2013 (that calculated from annualising the figures for the first eight months to August 31). I would draw out her point about the juniors in terms of uranium and potash: on the TSX.V these are commodities with considerable numbers of juniors exploring or developing, so the severe shocks about which Mohr writes would naturally have a trickle-down effect to the more speculative end of the market, not to mention those companies already mining them.

Potash prices were at $417.50/tonne prior to the bust-up, and hey dropped to 370/tonne in September and are about $310/tonne to $305/tonne this week (which Scotiabank bases on the prices being paid in Brazil and Southeast Asia). “Uralkali’s announcement that it would maximize sales at the expense of prices has had the predictable impact of delaying purchases and inventory-building by foreign buyers, expecting lower prices,” the report said.

The status of contract prices with North American potash powerhouse Canpotex are unknown, but Mohr expects they are unlikely to be negotiated any lower than the $375/tonne cfr deals done by Uralkali and Israeli Chemicals. (See below for a varying opinion.)

But not everything is looking negative. Mohr says that while potash prices will likely drift down over the last two months of the year, the global cost curve indicates that most of the decline has already occurred and prices are at near bottom (at least on a sustainable basis).

People walk out from an office of the Belarusian Potash company in MinskHowever, here is Patricia Mohr’s big call: Belarus would like to restore the BPC arrangement with Uralkali — a development which she thinks seems increasingly likely as 2014 unfolds.

If that happens, the potash sector will be back on the tracks. As Scotiabank notes without comment, “Potash Corporation is at the ‘bottom half’ of world cash costs”.

Meanwhile, The Financial Times, referring to the dispute between Uralkali and Belaruskali, reports that analysts are beginning to move “beyond the rumblings from Moscow and Minsk and are talking about a possible floor for the potash price”. What the market is watching is what happens with the forthcoming supply contract between China and Canpotex expected to be negotiated at the end of this year or in early 2014. It points out that the start-of-the-year contract has tended to provide price benchmark for the overall market. With domestic prices in China between $320/tonne, the analysts expect the contract to be settled anywhere between $300 and $350.

The newspaper says the cost of production will also have some influence on the floor price, the costs at the more marginal producers being in the high $200s.



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