SRUXF - Potash Outlook 2020: Weather Will be Deciding Factor for Growth
2019 was challenging for the potash sector, with weather-related output issues impeding growth in the industry as a whole and a rail strike affecting Canadian producers specifically.
Although prices for muriate of potash (MOP), the main type of potash fertilizer, trended higher in the second half of the year, more than one miner made the decision to reduce production.
The year started with MOP selling for US$215 per metric ton, and its price remained unchanged until mid-February, when it began a steady upward movement. By March, MOP was valued at US$245, and in April the price hit US$265.50, where it has remained.
This growth in MOP prices has created optimism about pricing in 2020, when demand for the fertilizer is expected to increase globally. Read on to learn what key factors impacted the potash space in 2019, and what market participants anticipate for the potash outlook in 2020.
Potash outlook 2020: Price performance review
2019 started with bad news for the Canadian potash industry, when Saskatchewan’s provincial government decided to do away with a potash production tax credit that had been in place since 1990.
Canada is the world’s largest potash producer, accounting for 29 percent of global supply, or roughly 20.3 million metric tons.
The loss of the C$117 million tax incentive was an early omen for what would be a rough year for Canadian fertilizer producers.
“This is not the way to treat the potash industry, which continues to contribute so much to the Saskatchewan economy,” Garth Whyte, president and CEO of Fertilizer Canada, said in an announcement regarding the loss of the tax break.
The impact of the US-China trade war weighed on the sector, but weather was the ultimate damper for the potash market in 2019.
As Gensource Potash (TSXV:GSP) CEO Mike Ferguson pointed out, “(The) record rainfall and high water levels … (led to) diminished (potash) application rates.”
This issue was further compounded by China’s domestic stockpiling.
“(I)t is clear that China has been building supply at the tidewater storage facilities over the past year in an effort to create leverage in the annual potash contract negotiations,” said Ferguson. “With excess tonnes stored in-country, new imports dropped, leaving an impression that demand was down.”
While the global potash price average has remained stable for the majority of the year at about US$265, the appearance of a reduction in demand from China has created volatility in North American pricing, which has slipped from the US$315 range to US$295.
“But this pullback is not as large as (what) might be expected, due to the nature of the potash industry,” said Ferguson. He noted that the market has experienced a rebalancing through production curtailments, which he believes will lead to higher prices.
“True demand for potash is in the farmer’s field; all the rest of the smoke is just politics. Soil doesn’t play politics,” he said.
Nutrien (TSX:NTR,NYSE:NTR), the world’s largest potash producer, was one miner to make cuts, announcing in September that it would idle production at three projects in Saskatchewan for eight weeks in Q4.
Nutrien estimated that its potash output could be reduced by approximately 700,000 metric tons over the period. Annually, Nutrien produces and distributes 27 million metric tons of potash, nitrogen and phosphate.
“Despite the current short-term market conditions, we remain positive on potash demand for 2020, as well as the medium to long-term potash fundamentals,” reads the announcement. “We remain focused on a gradual ramp up of production to meet demand and to ensure we operate the safest, most reliable and efficient potash business in the world.”
German potash producer K+S (ETR:SDF) followed suit with an output decrease of its own that could take up to 300,000 metric tons off the market.
“In the current weak market environment, which is further intensified by the continuing Chinese import bans on the standard potassium chloride product, adjusting production is a difficult decision, but the right one,” Alexa Hergenröther, CEO of K+S’s Europe operating unit, said in the announcement.
Before the year was over a third fertilizer company, Mosaic (NYSE:MOS), had announced it would also curtail potash production in response to weak demand. The move was expected to reduce Mosaic’s annual output by as much as 600,000 metric tons.
“While near-term fertilizer markets remain challenging, we continue to expect a very strong application season in Brazil and North America, and a better supply and demand balance in 2020,” said president and CEO Joc O’Rourke at the time.
Producers weren’t the only segment affected by contracted demand. Developers also felt the market constraint, most notably UK-based Sirius Minerals (LSE:SXX,OTC Pink:SRUXF), which had to scrap its US$500 million bond offering and put a multibillion dollar project on the backburner. The move resulted in a major share price drop for the company.
But while the North American market faced challenges in 2019, the Australian potash sector experienced tailwinds that helped the space grow.
Australian companies Kore Potash (ASX:KP2,LSE:KPT,JSE:KP2), Kalium Lakes (ASX:KLL) and Australian Potash (ASX:APC) were all able to advance their respective projects in 2019 despite market challenges.
The growth of Australia’s domestic and international sulfate of potash (SOP) production efforts is positive for the market as a whole; however, as Ferguson noted, investors should be cautious when looking at the Aussie sector, and should not expect broad market conditions to equal positivity for all.
“SOP projects in Australia look promising, but there are so many of them now (that) the investor needs to be careful if she or he makes a judgement that ‘this project will work because the last one did,’” he said. “Again, it doesn’t work that way.”
Potash outlook 2020: What’s ahead?
As the North American market begins to recoup from its downturn, analysts remain optimistic that demand for fertilizers like MOP and SOP, a more premium fertilizer for high-value crops, will grow into the next decade.
According to the International Fertilizer Association, 25 percent of global crop land has experienced degradation, which over time will make it harder to grow sustainable crops. In addition to that, the impacts of climate change are growing.
The organization expects demand for fertilizers to increase significantly by 2030 to offset the effects of soil degradation and greenhouse gas emissions.
While the long-term outlook bodes well for the sector, Gensource’s Ferguson remains a realist, especially in a sector that is so weather dependent.
“Our expectation was that 2019 would be a good year for fertilizers. Following the bad-weather autumn of 2018 in the US market, significant tonnages of fertilizers were delayed,” he said.
However, a wetter-than-expected spring in the US prevented farmers from planting and fertilizing.
“The result was that, even if a farmer had good weather and could apply fertilizers, often she or he would find constrained supply because of the lack of river system capacity. So, I think we were all wrong — Mother Nature wins again,” said Ferguson.
If the weather of 2020 cooperates with producers and farmers, Ferguson sees the market improving.
“The true demand for potash is in the soil,” he said. “If corn and soy prices stay reasonable, then we expect a good year in 2020, following a tough 2019 (and late 2018). What are the numbers? No one knows, but we expect a return to the typical 2 to 3 percent per annum long-term growth rate.”
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
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