Potash Weekly Review: Potash rises on Higher Oil Price Tide
The ProEdgeWire potash partners showed a 20% increase in share price for the month of January. The sector hinted toward an improvement in mid January after Agrium Inc announced better than expected results for the quarter. Allana Potash (TSX: AAA; OTCQX: ALLRF) saw a 20% increase, a big jump, ahead of the release of its Bankable Feasibility Study, while Magna Resources (CNSX: MNA) and Potash Minerals (ASX: POK) rose 75% and 31% respectively. Both companies are developing potash projects in Utah and there have been increasingly vociferous rumors of an announcement from the US Federal Bureau of Land Management (BLM) over drilling rights on Federal land. These companies’ individual announcements and indicators were further strengthened by overall favorable market conditions for agricultural commodities and fertilizer demand. IC Potash (TSX: ICP; OTCQX: ICPTF), developing a sulfate of potash resource in New Mexico is also expected to present its bankable study in mid- to late 2013 as well.
Oil prices have been in the news again and they are rising due to Middle East tensions and Saudi production cuts (not to mention pressure from Iran and Iraq within OPEC). As 2007-2008 showed, rising oil prices push food prices up: transport costs go up as does the price of land as more of it gets used for producing bio-fuels. There is a well proven relationship between the performance of agricultural commodities such as fertilizers, grain prices and oil and it is not surprising that potash prices reached their USD$ 900/ton peak just as oil prices reached their peak for the past five years. Weather uncertainties, like the drought in the United States last summer and heavy rains in South America boosting soybean prices, have also contributed to rising food costs. Grain prices in North America affect farmers’ demand: the higher the price, the stronger the incentive to produce, leading farmers to extend their acreage. Predictions of an global economic recovery – buoyed by recent Chinese announcements that its economic growth in 2012 was higher than expected and higher US employment numbers – should help keep oil price on their high side, at least until they start to have a negative effect on economic growth.
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The other big factors for potash demand have been India and China. The problem here has had more to do with the potash ‘cartel’ pricing than demand in either one of these two major potash consumers. China delayed their potash with Potash Corp contract, finally ‘forcing’ Canpotex to agree on a price that was USD 70/ton less than the previous one for 2013. Indian farmers have been under-utilizing potash because of government subsidies having been directed toward nitrogen and because of a 20% devaluation of the Rupee, generating a complicated price hurdle to overcome for potash purchases. Indian farmers were simply unwilling, and unable, to afford potash at cartel pricing. This suggests that when the current juniors, outside the ‘cartel’, move into production phase, they can expect eager customers. Even while both Chinese and Indian farmers would like to buy more potash to improve yields and quality, if the prices are too high, they simply remain unwilling to buy.
As for phosphate, its outlook may be even more bullish than potash. As noted last week, Morocco is moving aggressively toward the higher margin processed phosphate products, meaning that its virtual phosphate oligopoly, OCP, has started to tighten supply of rock phosphate to such buyers as Mosaic (NYSE: MOS) or Agrium (NYSE: AGU; TSX: AGU) in the US, which process Moroccan phosphate to make fertilizer products for North America. Even Brazilian farmers tend to use phosphate products imported from Africa although there are rich phosphate resources in Brazil itself waiting to be exploited. The tightening supply for Morocco should drive the need for more new phosphate projects.
The following are the monthly share price changes for January 2013: