By James Wellstead- Exclusive to Potash Investing News
As farmers continue to shirk the perceived need for growing potash and phosphate fertilizer applications, mining giants Potash Corp (NYSE:POT) and Uralkali (LSE:URKA) have both announced production cuts in order to buoy potash prices at current levels.
Slow farmer buying has led Potash Corp to shut down potash production temporarily at three of its Saskatchewan mines this winter, leading to a 10 percent cut in the company’s operational capacity. Uralkali has also chopped its 2012 production target by about 8 percent, down to between 10.5 and 10.8 million metric tons.
Despite a number of new projects ramping towards production in the coming year, Mark Connelly, a New York-based analyst at Credit Agricole Securities USA Inc., recently told Bloomberg that “if the Canadian and Russian producers are aggressive in matching supply and demand, it shouldn’t matter very much what other producers do.”
As a result, production levels are undergoing the biggest cuts since the crash of 2008-09, when potash prices fell from about CA $1000/ton down to around $300. Currently, prices are relatively steady around the $550 level and the plan is to leave potash fertilizer production around the same level of 2011, about 58 million tons.
Mid-term fertilizer production to return
Resolute on its near term prospects, Potash Corp president and CEO Bill Doyle said “[e]ven though buying is slow today, we are confident that farmers will not pass on this opportunity, and we anticipate a strong spring [fertilizer] application season,” in a Q4 earnings call on 26 January.
“Although fertilizer purchasing patterns can shift for short periods, the need to improve crop yields and the science of fertilizer demand do not change,” said Doyle. “We understand the necessity of looking beyond short-term market fluctuations and preparing for the long-term growth that typically follows.”
Potash Corp believes one of the determinants behind this projection is a perception of unsustainable farming practices in past years which has led to deficits of crop nutrients in land across China, Brazil and India. Spurred on by strong demand, a recent Potash Corp note suggested that there is an increasingly pressing need to restore soil fertility through restoring balanced potash fertilization.
A number of analysts agree with the mid-term projections of Doyle. Credit Suisse recently released a note citing favorable farmer economics leading to “strong North American fertilizer earnings in 2012 due to strong grain price fundamentals particularly in corn.” Yet, farmers remain weary over uncertain overall trends in crop prices in North America and internationally.
Another season of uncooperative weather in grain markets could become an influential factor in shaping grain markets internationally. Wheat markets rallied today in Europe, hitting a five month high, as cold weather in the Ukraine, and concerns over potential Russian export barriers, shifted traders’ outlook.
Russia, a “key market determinant,” had a large impact on wheat markets in previous years after implementing grain bans in 2010-11. The bans, which sent prices higher, also eased tight supplies in world grain markets in 2011 when flooding in many key North American grain regions stifled supply.
Phosphate prices continue their downward slide on the same persistent concerns flagging potash markets: short-term concerns over falling crop prices and a weak macroeconomic picture.
Prices are also responding to increasing supply. With many producers currently sitting on ample supply, and output from Saudi Arabia’s Ma’aden project and Brazilian manufacturers set to ramp up diammonium phosphate (DAP) production, Credit Suisse recently predicted that “over the next few years, we anticipate a largely supply-driven market,” in phosphate markets. As a result, DAP prices out of the US Gulf were forecasted to settle around US $535/t in 2012 and fall to US $530/t in 2013.
However, short term volatility is possible as a strike at the state-run Office Cherifien des Phosphate (OFC), S.A. threatens to disturb Moroccan production following a year on year increase in Moroccan exports of phosphate and its by-products of 31.8 percent, and a six month increase of some 44.4 percent. With more than 70 percent of world phosphate reserves, but accounting for less than 15 percent of world production, disturbances coming from OFC’s 20,000 employees could carry real consequences.
Mesa Exploration Corp. (TSXV:MSA) recently announced it has acquired the 104 square mile Bounty potash project in the Great Salt Lake Desert of Western Utah, consisting of 90 square miles of potash prospecting permit applications from the Bureau of Land Management (BLM) and 14 square miles of Potash Leases from the State of Utah. Just north of, and physically analogous to, Intrepid Potash (NYSE:IPI)’s Wendover operation, the Bounty project is likely to utilize a system of potash brine collection ditches and solar evaporation ponds, with potash and salt being processed in a simple flotation mill similar to that of the Wendover mine. Mesa President and CEO Foster Wilson said that “the Bounty project is a very attractive asset. With confirmation and infill drilling success, the existing resource has good potential to be confirmed, upgraded and enlarged.”
Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.