Fertilizer International 500 Jan-Feb 2021
31 January 2021
Potash players endure tumultuous 2020
POTASH MARKET REPORT
Potash players endure tumultuous 2020
Despite the unprecedented economic woes inflicted by the Covid-19 pandemic, the global MOP industry still managed to endure in 2020, says Andy Hemphill, senior editor for potash at ICIS Fertilizers, thanks to its ‘essential’ status.
2020 – a year without precedent
Unprecedented is a word that is bandied about with little care for its true meaning, which is ‘never having happened or existed in the past’.
Nevertheless, by this definition, what happened to the global potash market during the whole of 2020 was truly unprecedented and completely unforeseen.
Even expert observers can get things wrong. With the benefit of hindsight, looking back at the article I wrote on the MOP (muriate of potash) market for this magazine in late 2019 (Fertilizer International 494, p59), the tone now appears almost laughably naïve:
“After a rocky second half of 2019, the global MOP industry limps into 2020 amid hopes that tight production control – and the potential for resurgent fertilizer demand – could spur trade and even, perhaps, a price recovery.”
At that moment in time, little did the world suspect that the arrival of a global pandemic would derail and sweep aside all our plans. As we now know, Covid-19 subsequently touched every continent, even Antarctica, inflicting untold economic damage and causing immeasurable human misery during its inexorable spread.
Against this backdrop, it will no doubt surprise some that the global MOP industry actually endured better than many other industries – including rival types of fertilizer manufacturing.
An essential industry
With a global nameplate production capacity above 69 million tonnes per annum, and with around 53 million t/a traded annually, potash is one of the world’s most widely-used stock fertilizers, trusted by agribusinesses across the globe. Yet, in stark contrast to its widespread use, deposits of this natural mineral fertilizer are concentrated in a just a handful of countries, notably Belarus, Canada, Germany, Israel, Jordan and Russia.
This contrast – between massive market size and the limited number of production centres – actually worked in the potash industry’s favour as the coronavirus spread across the globe. Indeed, concentration of supply meant the potash industry was better placed when it came to overcoming the logistical difficulties faced by rival fertilizer producers and many other industrial sectors.
Going back more than 12 months ago, prior to the pandemic, potash producers responded to difficult global market conditions by publicly announcing production cuts at the end of 2019 – a tried and trusted response to what is traditionally a period of slower of demand.
But did the potash majors act fast enough to curb production in late 2019? With hindsight, probably not, given the already high inventory levels in Brazil, a key importing nation – a situation that was compounded by the waiting game being played by Chinese buyers over their next long-term import contract.
That left the market somewhat long as 2020 approached. This was also the moment when coronavirus first appeared in Wuhan, China, and began to spread, fast. As 2019 ended and 2020 began, the general consensus – pre-pandemic – was the potash market would remain inactive until March, at least.
At the start of the 2020 calendar year, Southeast Asian buyers were stalling purchasing decisions, awaiting news of a new bellwether settlement from China. Meanwhile, key importing companies in India tired of waiting for China and instead settled their own supply contract at $280/tonne cfr (cost & freight). This was a $10/t decrease from the 2019 agreement, even if it only covered the first six months of 2020.
Soon after, the market began to show several signs of recovery – with Indian buyers purchasing cargoes, Southeast Asian powerhouse PT Pupuk Indonesia snatching up large tonnage volumes (albeit low-priced material from Laos) and Brazilian warehouse draw increasing.
But this recovery proved short-lived as Covid-19 began to take hold. Values quickly slipped again, depressed by weak demand, as nations awoke to the threat of the coronavirus in their midst. A blizzard of negative factors then hit – civilian lockdowns, plant closures, port force majeures, workforce restrictions and fluctuating exchange rates – causing many months of previously unexpected disruption.
The ‘new normal’
After the initial chaos, the classification of fertilizers as ‘essential goods’ by most governments proved to be a pivotal moment. By helping to strip out logistical snags, this declaration provided the clarity and impetus for potash trading to resume. The supply and distribution of potash, all the way from mine to field, improved as a result.
This was also the moment when the potash market’s reliance on a limited number of major players proved to be a strength, as it allowed countries such as Russia and Belarus to cut through red tape and ensure their big-name MOP producers kept trading with relative ease.
That left the industry with just one key hurdle to overcome – the slow degradation of potash prices at points across the globe. It was decisive action by the Belarus Potash Company (BPC) that nipped this concern in the bud at the end of April last year.
In a surprise announcement, BPC revealed it had settled a long-term contract to supply a consortium of Chinese buyers with standard-grade MOP fertilizer in the second half of 2020 at a price point of $220/t cfr (Fertilizer International 496, p8).
This agreement – a $70/t reduction on the previous benchmark of $290/t cfr for 2018-2019 – caught many players off guard. One Southeast Asian distributor even described the decrease as “amazing” and “beyond predictions”. It is certainly true that the predicted potential decrease of $30-50/t for this key bellwether deal, the cut which was thought to have been on the table, in the end proved too conservative.
BPC called the contract “a vital step” and said at the time: “The price of the new China contract builds a firm foundation for the stabilisation, recovery and further incremental development of the global potash market.”
Such sentiments were not universally shared, though. The deal left Russian rival Uralkali particularly unimpressed:
“The price agreed is not appropriate either for the length of that particular contract, or for the industry as a whole.”
“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.”
Then, just two weeks after this benchmark deal with China, the global MOP market watched with interest as the Indian settlement arrived. This six-month potash supply contract to the subcontinent was finalised at $230/t cfr – a $50/t slide on the last Indian deal and $10/t above China’s benchmark deal. This second potash agreement further cemented “the basement of the market”, as the Latin American sales chief of one MOP major put it.
Steady improvement
Two main schools of thought emerged as the third-quarter of 2020 dawned.
The optimists viewed the China and India settlements as a useful jumping-off point for trade and a secure bottom to the market in a time of uncertainty. But others were more pessimistic, viewing the latest agreements as an unwelcome decline that undercut the future stability of the potash industry at a critical time, given the future uncertainty.
This division of opinion, between the optimists and the pessimists, was even reflected geographically by a growing divergence in potash pricing east and west of Suez (Figures 1 and 2)
In Southeast Asia, for example, many palm oil plantations – notably in Malaysia – continued to delay potash applications under the pressure of fluctuating crude palm oil (CPO) futures and returns. This reluctance to buy, combined with the price decline in China’s long-term agreement, saw bids for both standard- and granular-grade potash drop abruptly, leaving producers with little room for manoeuvre in talks with buyers.
Brazilian demand, in contrast, became increasingly healthy throughout 2020, even though the threat of coronavirus-related disruption continued to loom large. Brazil’s reliance on truck transport, in particular, presented additional risks. This could have left the market paralysed if drivers had opted to remain at home to protect the health of their families.
In the event, MOP majors managed to sell June and July 2020 cargoes to Brazil at $230/t cfr. Sellers then pushed-up prices by a further $10/t during August, September and into October. By November last year, granular MOP was landing in Brazil at around $250/t cfr and above.
Although this rising price trajectory was impressive, with sales into the Latin American powerhouse closing-out 2020 in the $250s-260s/t cfr, prices still have some way to go before reaching the highs seen for Brazilian granular MOP in 2019.
Financial woes
It was not just potash pricing that bore the brunt of the global pandemic during 2020. The finances of some of the industry’s major players also suffered, as third-quarter company results revealed.
In early November, for example, Germany’s K+S announced it was expecting a one-off, non-cash loss in the third-quarter of 2020 of around two billion euros ($2.4 billion), with weaker global pricing for MOP and MOP-related fertilizer products partly responsible.
In the third-quarter, K+S also completed the sale of its North and South American salt business to US-based Stone Canyon Industries Holdings. This early October transaction, which netted $3.2 billion, was the result of a strategic decision by K+S to refocus on its core business – the production and sales of commodity and speciality fertilizers – as part of a new approach unveiled in March 2020.
K+S also used third-quarter results as an opportunity to revise its potash price assumptions. Although the company is still forecasting a rise in MOP prices in the short- and medium-term, long-term price trends were corrected downwards, and are now lower than previously expected.
Potash segment earnings (EBITDA) at Canadian fertilizer giant Nutrien also took a knock in the third-quarter of last year, declining by 24 percent year-on-year to $328 million (Table 1).
The company – one of the world’s largest MOP producers – also placed the blame for lower earnings on weaker MOP pricing, as well as coronavirus-related disruption in the first nine months of the year. These negative factors were partially offset, however, by stronger sales and lower production costs in the second- and third-quarters.
Despite Covid-19 disruption, Nutrien’s third-quarter North American sales volumes declined only one percent year-onyear, while offshore sales increased by some 24 percent. Indeed, third-quarter sales were Nutrien’s second highest quarterly sales ever, while sales for the yearto-date were the highest on record for the first nine months of the year.
These strong sales figures reflected the buoyant performance of Canpotex, the international MOP trading arm of Nutrien and Mosaic. Canpotex directed some sales away from Latin American markets towards India and China during the third-quarter of 2020, compared to the previous year (Table 2).
At Israel’s ICL, MOP fertilizer segment profits in the third-quarter of 2020 also decreased by two-thirds year-on-year, similarly affected by the market factors that hit both Nutrien and K+S (Table 3). ICL went further, however, by directly naming the lower-priced contract settlements with key buyers in China and India – negotiated by BPC – as being partially responsible for the decline in its sector profits.
Mergers and acquisitions
Amid the backdrop of the pandemic and falling prices, 2020 witnessed a number of market-moving corporate restructuring and trading announcements.
In the UK, the £405 million ($518m) takeover of prospective polyhalite fertilizer producer Sirius Minerals by global mining major Anglo American was approved by shareholders in a landmark vote held in London – far away from its headquarters and under-construction Woodsmith mine site in North Yorkshire.
The UK-listed company first revealed in last January that it was in advanced discussions with Anglo about an all-cash offer for its entire share capital at 5.50 pence per share. Anglo subsequently went ahead with this buy-out, paying cash for Sirius Minerals based on a revised valuation of £405 million.
Since then, Anglo has pushed forward construction operations at Woodsmith mine to bring its new acquisition online. While originally sticking to the established project schedule for 2020 and 2021, Anglo has signalled its intention to “update the development timeline, optimise mine design and ensure appropriate integration with its own operating standards and practices”.
In Russia, major nitrogen fertilizer producer Uralchem officially acquired a 75 percent share capital in MOP producer Uralkali in early December. This provides Uralchem with a controlling interest in the major potash producer, which is based in Russia’s Perm region, east of Moscow.
The move is unsurprising given that Uralchem and Uralkali had already been integrating their businesses for some time. Indeed, the formal announcement of a controlling interest is viewed as a necessary internal restructuring of the business, as it will now allow the pair to jointly supply customers with combined ‘package offers’ – a sensible move given that Uralkali’s MOP product offering naturally complements Uralchem’s ability to supply nitrogen and phosphate-based fertilizers. Shortly after announcing the share purchase, Uralchem unveiled joint plans to supply Sudan with its own products in 2021 alongside potash from Uralkali.
In the Middle East, major Israeli MOP producer ICL announced it was purchasing Brazilian speciality fertilizer firm Fertiláqua for $120 million (Fertilizer International 499, p10). The investment is designed to significantly expand ICL’s on-ground presence in Brazil, a key importer of MOP and other fertilizers. Fertiláqua serves 500-plus customers across 24 Brazilian states and markets more than 100 different products. ICL expects to close the purchase early in 2021, subject to customary conditions.
Looking ahead
At time of writing (early December), no real news has emerged about the progress of the key benchmark annual contracts – those of India and China – which will ultimately define future price trends for much of the global MOP market.
The limited discussions that have been heard, however, suggest an increase is likely for both regions – a development that is more than warranted in the view of some sources. “We foresee an increase of around $40/t at least,” a source at one European MOP major told ICIS, referring to both the China and India long-term contracts.
What we also know is that India, once again, is likely to be first to the table. That’s because Indian buyers have chosen to exercise the option for extra tonnages under their outgoing six-month contract agreement. MOP arrivals at Indian ports under this $230/t deal are dwindling rapidly currently, with port inventories also in decline.
One key question that remains is: will Indian buyers once again opt to secure a six-month contract, or will they attempt to move back to a full-year agreement as MOP offers look set to increase?
In China, meanwhile, Beijing’s focus on ensuring food security during the Covid-19 crisis has tightened MOP availability. Traders there are obligated to supply the national Chinese reserve before shifting tonnes for themselves. Local pricing is also increasing, supported by expectations of higher import contract pricing in 2021. Similar to India, import shipments to China are also slowing and port inventories declining, two further factors that are underpinning firmer domestic MOP values.
From a wider perspective, the global MOP market is set to enter 2021 with levels of supply and demand broadly similar to last year – albeit with pricing well below that seen at the end of 2019.
In our view, it is likely that MOP offers will tick upwards over time, spurred by firmer contract prices in India in China. Nonetheless, this improvement is a relative one. The potash price highs seen in years past will remain a distant memory until coronavirus vaccines are rolled-out globally, allowing the world to turn rightside-up again.
