Fertilizer International 497 Jul-Aug 2020
31 July 2020
Potash players adapt to the Covid crisis
COVID-19 PANDEMIC
Potash players adapt to the Covid crisis
The fertilizer industry’s ‘essential’ status is no barrier to bearish pricing, according to Andy Hemphill, senior markets editor for potash at ICIS Fertilizers.
The global fertilizer industry has endured the hardships and uncertainty thrown up by an unprecedented global pandemic better than most. Yet there is no denying that potash market players have felt the disruptive influence of Covid-19.
As one of the world’s most-used stock fertilizers – with a global name plate production capacity for muriate of potash (MOP) north of 69 million t/a and around 53 million tonnes traded annually – potash is a commodity trusted by agribusinesses across the planet.
Conversely, in contrast to its widespread demand, potash supply is controlled by a small number of producers located in just handful of countries, namely Russia, Canada, Israel, Jordan, Germany and Belarus.
As Covid-19 spread internationally, this combination of a massive global market supplied by a limited number of large-scale producers has worked in favour of the potash industry by helping the sector avoid the logistical difficulties faced by the less consolidated nitrogen and phosphate sectors and many other industries.
Before the storm
The global potash market entered the Covid-19 pandemic having ended 2019 in a difficult position. Producers publicly announced cuts to production towards the end of last year – a traditional response to the slower period, demand-wise.
That said, potash producers were arguably too slow in acting to curb output in 2019. This was especially true given the already high inventory levels in Brazil, a key potash import market, and with Chinese importers played the waiting game on their next long-term import contract.
These factors combined to leave the potash market somewhat long on supply as 2020 approached. In the pre-pandemic start to the year, the general consensus was the potash market would remain inactive until March, at least.
Southeast Asian buyers were stalling purchasing decisions, awaiting news of a new bellwether Chinese settlement. In India, meanwhile, key importing companies, tired of waiting for China, had instead settled their own six-month supply contract at $280/t cfr (cost & freight). While this was down $10/t on the 2019 agreement, it only covered a six-month period of 2020.
The market responded soon after by showing signs of recovery. Indian buyers actively purchased cargoes, Southeast Asian powerhouse PT Pupuk Indonesia snatched up large tonnages – albeit low-priced material from Laos – and Brazilian warehouse draw also increased.
But these greenshoots were not to last. Values quickly slipped again, depressed by weak demand as nations awoke to the threat of the Covid-19 spreading in their midst. The resulting civilian lockdowns, plant closures, port force majeures, workforce restrictions, and fluctuating exchange rates caused a month or more of unexpected disruption.
The ‘new normal’
From the chaos came limited clarity for the potash trade. Most governments classified fertilizers as ‘essential goods’, which stripped away some of the logistical snags and allowed improved transport of potash from mine to field. The likes of Russia and Belarus cut through red tape, ensuring the big-name players could keep trading with relative ease.
That left the industry with one key hurdle to overcome – the slow degradation of potash prices at points across the globe (Figure 1). A price descent that Belarus Potash Company (BPC) set out to nip in the bud with a surprising announcement.
On 30th April, BPC revealed it had settled a contract with a consortium of Chinese buyers for the long-term supply of standard-grade MOP fertilizer in 2020 at a price point of $220/t cfr (Fertilizer International 496, p8).
The agreement – a $70/t decline on the previous benchmark of $290/t cfr agreed for 2018-2019 – took many players by surprise, with one Southeast Asian distributor describing the decrease as “amazing” and “beyond predictions”.
Although potential decreases of $3050/t were heard to be on the table for this key bellwether deal, in the event such predictions proved to be too conservative.
Announcing the contract as “a vital step”, BPC said: “The price of the new China contract builds a firm foundation for the stabilisation, recovery and further incremental development of the global potash market.”
Rival Russian potash producer Uralkali, however, was distinctly unimpressed. “The price agreed is not appropriate either for the length of that particular contract, or for the industry as a whole,” Uralkali judged.
“Potash producers incur high investment costs to maintain existing production capacities and develop new deposits. This activity is necessary to meet the growing global demand for fertilizers,” Uralkali added.
Then, just two weeks after news of the Chinese benchmark deal, the global potash market watched on with interest as the Indian settlement arrived.
This six-month supply agreement was finalised at $230/t cfr – a $50/t slide on the last agreement – but $10/t above China’s benchmark deal. This further cemented “the basement of the market”, as a Latin American sales chief of one potash major told ICIS.
Onwards and upwards?
Now, as 2020’s third-quarter approaches, two schools of thought have developed in the global potash market.
One school holds that the China and India settlements are a useful jumping-off point for trade, and a secure bottom to the market in a time of uncertainty.
However, another rival school of thought is that these contract price declines undercut the future stability of the potash industry, at a time when the world and the industry is facing future ambiguity ahead.
Indeed, this divergence of opinion and market ambiguity has been reflected in pricing.
In Southeast Asia, many palm oil plantations, most notably in Malaysia, feeling the pressure of fluctuating crude palm oil (CPO) futures and returns, continue to delay potash applications.
When combined with the decline in China’s long-term agreement, this has seen bids for both standard– and granular-grade potash drop abruptly (Figure 2), leaving producers with little room to manoeuvre in talks.
Conversely, the other side of the coin is that Brazilian demand has become increasingly healthy throughout 2020 – even though the threat of coronavirus-related disruption continues to loom large over the nation. Brazil’s logistics are particularly vulnerable as its reliance on trucks for transport could leave the market paralysed, should drivers opt to remain home to preserve the health of their families.
Potash majors sold June and July Brazil MOP cargoes at $230/t cfr, and have pushed up price levels by $10/t for August, September and October offers.
That said, compared to the highs seen in Brazilian granular pricing in 2019, sales into Latin America’s agricultural powerhouse still have some way to go (Figure 3).
Second wave spectre
Overall, the potash market has withstood the trials of the Covid-19 pandemic with relatively little disruption thus far. But few in the market are confident that no more difficulties lie ahead, especially with the potential spectre of a second wave of infections on the horizon.
