Potash Outlook: Soft Potash Prices Ahead

Potash Outlook: Soft Potash Prices AheadPotash investors are probably ready to say adios to 2013. However, those looking for 2014 to bring with it greener pastures should probably brace themselves for what’s coming. 

Sowing the seeds for 2014

Earlier this year, when Russia’s Uralkali broke away from Belarussian Potash Company (BPC), the European potash marketing arm, potash prices were hammered alongside the share prices of North American potash producers.

With the expectation that potash prices could land below $300 a ton, the news was heralded as ”the end of the potash world as we know it,” by BMO Nesbitt Burns analyst Joel Jackson. Meanwhile, Elena Sakhnova, an analyst at VTB Capital, told Bloomberg that ”Uralkali’s announcement completely turns the global potash market upside down.”

In the months following Uralkali’s announcement, the market was expecting the worst. The expectation that Uralkali was planning to undercut its competitors with a flood of cheap supply remained a source of worry.

Saskatchewan down

As mentioned, Uralkali’s big move shook up North American potash producers. Directly following the news, shares of the majors, including Potash Corporation of Saskatchewan (TSX:POT,NYSE:POT) and Mosaic (NYSE:MOS), were down almost 25 percent. With that in mind, September saw the release of RBC Economics’ Provincial Outlook, in which the firm slashed its forecast for the province’s real GDP growth in 2013 and 2014 to 2.7 percent (down from 2.9 and 3.7, respectively).

“There is still considerable uncertainty around the response by potash producers in the province; however, we have assumed a sharp cutback in provincial potash production relative to the first part of 2013, resulting in much slower production growth in 2013 and 2014 of 6.5 per cent and 4.5 per cent, respectively,” chief economist Craig Wright said in a statement.

Most recently, major players have cut their outlooks, including PotashCorp, which expects a $307-per-ton potash price moving forward. The potash giant also recently cut its workforce by 18 percent, citing the need to maintain a sustainable business and protect the long-term interest of its stakeholders.

What to expect in 2014

On December 12, Belarus’ finance minister, Andrei Kharkovets, set export targets in 2014 at 6.6 million tons at an average price of $306 per ton. Belarus is anticipating lower volumes than in previous years, which has led to speculation that Belarus isn’t planning a volume over price strategy. While investors can rest — a little — easy in the knowledge that the potash market won’t be flooded, it does appear that demand may not rebound much. And considering that $306 is a soft price for potash, it does set the tone for what 2014 will bring.

However, before the market gets a firm understanding of where the potash price is headed in the new year, AltaCorp analyst John Chu explained that all eyes are currently on China signing its potash contract, which is the first few months of 2014.

“Until we get that price discovery, the market is going to be effectively at a standstill, for the most part. Obviously, no one wants to buy if they think prices might be a bit lower in a couple months. China is going to be the one that dictates that, more of that benchmark floor price,” Chu told Potash Investing News in a phone interview.

China’s last contract was inked at $400, and Chu sees speculation around the next contract lingering in the mid-$300, with concern that it could go lower.

Any upside? 

With PotashCorp bracing itself for a potentially weak market, Chu sees some cause for concern. However, he also sees a few underlying factors that could signal a rebound in the fertilizer prices if all goes well.

“There are a couple underlying factors,” Chu said. “First will be whether or not the Russian Uralkali and Belarus can get back together. We’ve seen some signs that that suggest that there could be a reunion down the road, the first being the share stake sale of the major shareholder, and the second thing being the return of the CEO back to Russia. We always thought those are the first two steps required before talks of a reunion could take place.”

With those two steps taken, Chu believes that there may be room for some discussion from both parties, though how long it will take for either party to come to a conclusion is anybody’s guess. Should Uralkali and Belaruskali reunite, the market would once again see supplier discipline, lending support to prices.

 

Securities Disclosure: I, Vivien Diniz, hold no investment interest in any of the companies mentioned in this article.