Bloomberg News

Potash Rally to Slow as Mining Capacity Expands: Commodities

November 01, 2011

(For more commodity columns, click CMMKT.)

Nov. 1 (Bloomberg) -- Potash’s rebound from the biggest plunge in 48 years will slow next year as Mosaic Co., Potash Corp. of Saskatchewan Inc. and OAO Uralkali increase mining capacity.

Potash Corp., the largest producer by market value, will see its average selling price climb 22 percent in 2012 after an estimated 35 percent gain this year, Don Carson, an analyst at Susquehanna Financial Group in New York, said in an Oct. 28 note. U.S. Midwest prices will fall 5.2 percent in 2012 after rising 32 percent this year, according to RBC Capital Markets.

Potash miners are expanding as the global population surpasses 7 billion and rising prosperity in developing nations puts pressure on food supplies. Producers of the form of potassium also are seeking to avoid another spike in prices like the one in 2008, which spurred some farmers to shun the nutrient as crop prices fell. Worldwide potash demand dropped 43 percent the following year, according to RBC.

“We are trying to be cautious and we are going to increase prices for our product only if we see that the economics of farmers is positive,” Uralkali Chief Executive Officer Vladislav Baumgertner said in an interview. “A lot will depend on the performance of agriculture markets.”

The average U.S. cash corn price tracked by the Minneapolis Grain Exchange has fallen 18 percent since reaching a record $7.69 a bushel on June 12.

Saskatchewan Plans

“Farmer economics are less robust now,” Ben Isaacson, an analyst at Scotia Capital in Toronto who cut his rating on Potash Corp. to “sector perform” from “outperform,” said in an Oct. 28 note. “The potash bull run may be cracking.”

Uralkali plans to spend $5.8 billion to raise annual production capacity by about 80 percent to 19 million metric tons by 2021, the Berezniki, Russia-based company said Oct. 25. Output will climb to 13 million tons in 2012 from about 11 million this year, Baumgertner said Oct. 28 in New York.

Mosaic is bringing on about 200,000 tons of extra capacity at its Colonsay and Esterhazy mines in Saskatchewan, said Rob Litt, a spokesman for the Plymouth, Minnesota-based company.

Potash Corp. will begin phasing in production from its expanded Cory mine in Saskatchewan in 2012, said Bill Johnson, a spokesman. The company plans to raise capacity at existing mines to 17.1 million tons by 2015 from an estimated 11.3 million this year, RBC said Oct. 26, citing company data.

Supply Concern

“We are concerned that the rate of new capacity additions between 2010 and 2020 may outpace the rate of demand growth,” Adam Schatzker, a Toronto-based analyst at RBC, said in an Oct. 26 note. “The future price of potash will be highly dependent on the management of operating rates to match demand.”

Potash helps plants to grow strong roots, resist disease and withstand drought conditions while improving the taste, texture and color of crops.

Prices tripled in 2008 as crop prices soared. The crop nutrient reached $872.50 in February of that year, according to World Bank data. It then tumbled 48 percent in 2009, the largest annual decline since at least 1961.

While prices have risen 33 percent to $470 a ton so far this year, they dropped 2.6 percent in September, the first monthly decline since October 2010, the World Bank data show.

To be sure, prices aren’t likely headed for a collapse similar to the one in 2009. “Today the story is quite different,” Baumgertner said.

Market ‘Nervousness’

“There is some nervousness in the market,” he said. “Nevertheless, prices for soft commodities are stable and high. Nobody’s considering to postpone deliveries” of potash.

Uralkali in August agreed to increase potash prices in India by 32 percent to $490 a ton.

“We’re going to sign a new contract with India and China in 2012 and we’ll be looking for a price above $530,” Baumgertner said.

Uralkali’s output is sold via Belarusian Potash Corp., a marketing company it jointly controls with Belarusian Potash Corp. Mosaic, Potash Corp. and Calgary-based Agrium Inc. sell their production through a company called Canpotex Ltd. The two marketing companies account for 57 percent of global potash exports, Uralkali said in a December 2010 presentation.

“We’re going to have extraordinarily tight markets because of the constraints on the production side,” Potash Corp. CEO Bill Doyle said on an Oct. 27 conference call. “We’re going to have a substantial price increase,” he said when asked about future gains.

Record Shipments

Potash Corp., the target last year of an unsuccessful $40 billion hostile takeover bid from BHP Billiton Ltd., estimates that global potash industry shipments will rise to a record 58 million to 60 million tons in 2012, from 57 million tons this year, it said Oct. 27.

The company may also add another 3 million tons of capacity on top of its current expansion program, though no formal plans have been developed, Doyle said. Mosaic, in which Cargill Inc. sold its controlling stake earlier this year, intends to add 5 million tons of capacity by 2020, according to Mosaic’s website.

Potash Corp.’s third-quarter net income more than doubled to $826 million. Urakali’s first-half profit jumped 61 percent. Mosaic’s profit gained 77 percent in the quarter ended Aug. 31.

“Even if the pace of price increases slows, potash producers will be happy,” said Jason Miner, a Princeton, New Jersey-based analyst at Bloomberg Industries. “Their per-ton earnings on potash are three times the historical average.”

BHP Project

Saskatchewan is home to almost half of the world’s potash reserves, according to RBC. Canada accounts for about 52 percent of estimated global reserves and Russia 21 percent, according to the U.S. Geological Survey.

Baumgertner said new entrants to the potash industry will help determine the shape of the market. BHP, the world’s biggest mining company, is considering whether to build the first phase of its proposed $10 billion Jansen potash mine in the province.

“There’s a question mark how many greenfield projects will be completed in the coming 10 years,” Baumgertner said.

Potash prices aren’t high enough to justify construction of new mines, Doyle said on the call.

“It’s like watching the ocean,” he said. “The waves breaking on the surface draw all the attention, but it is the current beneath the water that determines your direction.”

Potash Corp. fell 1.4 percent to C$46.50 in Toronto and Mosaic dropped 4.5 percent in New York while Uralkali slid 5.7 percent in London.

--With assistance from Jeff Wilson in Chicago. Editors: Simon Casey, Steven Frank

To contact the reporters on this story: Christopher Donville in Vancouver at cjdonville@bloomberg.net; Sonja Elmquist in New York at selmquist1@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net


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