Fertilizer International 506 Jan-Feb 2022
31 January 2022
Potash producers smash the price ceiling
POTASH MARKET REPORT
Potash producers smash the price ceiling
Belarus sanctions, freight costs and strong demand are pushing MOP pricing to new heights, says Andy Hemphill, senior editor for potash and sulphuric acid at ICIS Fertilizers.
The global potash industry stands on the brink of an upheaval not seen since major producer Uralkali separated from the Belarus Potash Company (BPC) in 2013. That seismic event shattered a cartel which had previously formed the bedrock of the traditionally slow-moving world potash market.
This time, however, it is BPC – not its Russian rival Uralkali – which is making headlines, having been swept up in a political storm that threatens to disrupt longestablished supply routes for the world’s 98 m tonnes annual trade in muriate of potash (MOP).
A year of change
The global potash industry, nonetheless, started 2021 on a firm note. Unlike many other industries – and, indeed, rival fertilizer fertilizers – as in, urea was in the toilet, MOP prices remained firm. Fortunately, the necessity of food production insulated the MOP industry from the worst ravages of coronavirus-related lockdowns and the attendant logistical mayhem.
Indeed, by mid-year potash market pricing had generally recovered to pre-pandemic levels, eventually reaching heights not seen in a decade as 2021 progressed. Standard and granular MOP sales into Southeast Asia, for example, breached $400/t cfr in July and then continued upwards. Towards the end of the year, sales of granular and standard product in the region plateaued at around $700/t cfr and 600/t cfr, respectively (Figure 1).
The only real surprise for the market was the weaker-than-expected price points agreed relatively early on in the year between BPC and key buyers in the bellwether nations of China and India.
Long-term supply contacts shock the market
BPC came under fire from rival potash producers in late January 2021 after it signed an 800,000-tonne annual supply agreement with regular customer Indian Potash Limited (IPL). This 12-month contract for the supply of standard-grade MOP, starting February 2021, was concluded at $247/tonne cfr (cost and freight). Although the agreement was a $17/t hike on the expired 2020 secondhalf contract price, it was still a far smaller increase than many players in the potash industry had forecast.
Then two weeks later BPC again shocked the market by settling a long-term contract to supply a consortium of Chinese buyers. This settlement, with importers Sinochem, CNAMPGC and CNOOC, was also signed at $247/t cfr – a $27/t increase on the expired 2020 contract – for shipments through to the end of December 2021.
At the time, BPC described this new Chinese deal as the next step in “strengthening the stability of the global potash market, and a positive sign for further price increases in other regions”. The settlement reflected “the real market situation” and offered an “incentive for positive price dynamics”, BPC added.
However, Canada-based Canpotex, the international potash trading arm of Nutrien and Mosaic, took a very different view. Responding to the Chinese settlement, it judged that the $247/t cfr agreed price was “significantly below current market levels for potash in offshore markets”. Other major potash producers were similarly dismissive. Indeed, the widespread disappointment over these settlements led to suggestions that producers might attempt private negotiations to secure their own, separate deals with Indian buyers.
Contrary to the critical comments from its rivals, BPC’s belief that its $247/t cfr contract agreements with India and China would provide a springboard for pricing in the wider global potash industry proved remarkably prophetic, as offers did subsequently increase through the first-quarter of 2021 and into the year’s second-quarter.
In April, for example, BPC and IPL announced a new higher price of $280/t cfr for a renegotiated Indian contract to supply 600,000 tonnes of standard-grade MOP. BPC followed this up by achieving further price rises in India in May, with Rashtriya Chemicals and Fertilizers (RCF) purchasing 105,000 tonnes of MOP at $290/t cfr. Chinese buyers, meanwhile, refused to follow this trend and instead remained firm at $247/t cfr.
Then, in mid-November, Israel’s ICL renegotiated a 150,000 tonne supply contract with IPL for standard MOP at $445/t cfr – a pricing level that will now set the jumping off point for 2022-2023 annual supply contract talks. China’s domestic MOP import price for ‘white’ Canadian potash, meanwhile, also recovered in November to its highest level of the year.
Record prices west of Suez
Elsewhere, Brazilian granular MOP prices stormed ahead as 2021 progressed, repeatedly smashing through the ceiling – firstly, by topping $500/t, $600/t and then $700/t cfr – and showing no signs of stopping (Figure 2). In October, Uralkali hit $800/t cfr on granular MOP sales into Brazil, supplying at least 25,000 tonnes for November loading. As a result, granular MOP pricing into Brazil has passed its record 2009 peak and is now moving into uncharted territory.
Grounded
However, as mid-year approached, western powers began to line up their crosshairs on Belarusian president Aleksandr Lukashenko’s prized potash industry.
The spark for this was the forced grounding of a Ryanair flight by Belarusian authorities in late May and the removal of activist and journalist Roman Protasevich – who remains under arrest, even now. As June progressed, there was widespread speculation that this unlawful action would lead to the imposition of sanctions on Belarus’ money-spinning MOP export operations.
This was proven true when the EU Council slapped sanctions on 78 Belarusian individuals and eight entities on 21st June, these including a ban on travel to the EU and the freezing of assets.
“These sanctions… send a further strong signal to the backers of the regime that their continued support for Alexander Lukashenko comes at a substantial cost,” the Council said at the time.
The sanctions list notably included entrepreneur Mikhail Gutseriev, owner of companies Safmar, Slavkali, and Slavneft.
But one of the largest impacts of the sanctions was on BPC’s longstanding agreement with the port of Klaipeda, Lithuania. The sanctions, by making Klaipeda off limits, removed BPC’s access to its primary potash export hub. The consequences of this are likely to be highly significant, given that Belarus is responsible for around 20 percent of the world’s potash supply.
Faced by sanctions, speculation on what export options were open to BPC quickly grew. A source at one European potash producer wondered if BPC could skirt the ban on straight MOP trade by switching to the production of nitrogen, phosphorus and potassium (NPK) fertilizer blends instead. A second source at another European producer thought Russian President Vladimir Putin might step in and assist Belarus, its traditional ally, by opening Russian ports to Belarusian potash tonnages.
BHP MUSCLES INTO THE MARKET WITH JANSEN PROJECT
Global mining superpower BHP has finally committed to entering the potash market.
In August 2021, the company’s board went ahead and approved the $5.7 billion capital expenditure needed to bring the massive Jansen project into production
The final investment decision for the Jansen mega mine in Canada’s Saskatchewan Province – announced as part of BHP’s annual 2020/21 results – was no real surprise. Especially as BHP had already invested approximately $3 billion sinking two shafts deep into the Canadian earth and constructing the necessary associated infrastructure.
BHP is forecasting that the global MOP market will grow to 89-97 million tonnes by 2035, supporting its case for the 4.4 million tonne annual output from the Jansen project and its expected 100year lifespan. The company predicts potash demand will catch up with excess supply during the late 2020s and early 2030s – a timetable that neatly fits Jansen’s expected ramp-up
Work on both shafts at Jansen is currently around 93 percent complete with first production expected by 2027.
Once Jansen is operational, Canada’s Westshore Terminals Investment Corporation will ship large volumes of MOP from the mine to overseas markets via Delta on British Colombia’s Pacific coast. Westshore has an agreement – subject to extension – to handle potash from the start of operations until 2051. This deal requires Westshore to complete the infrastructure needed to handle potash at its Roberts Bank Terminal by 2026, including a potash dumper, storage building and associated conveying systems. BHP is providing $33 million to fund the construction.
Announcing Jansen’s go ahead, BHP also took the opportunity to take a swipe at the higher costs of rival producers – specifically referencing potash solution mines that flood tunnels with water and then extract the resulting brine-rich fluids for processing on the surface.
“In addition to consuming more energy and water than conventional mines like Jansen, solution mines tend to have higher operating costs and higher sustaining capital requirements,” BHP said.
Previously, BHP also described potash extraction from resources owned by its rivals in Belarus and Russia as ‘mature’, an apparent reference to the ageing equipment and infrastructure operated by BPC and Uralkali.
Only time will tell if BHP’s gamble in proceeding with the Jansen mega project will pay off. But, with the global population only expected to increase in coming decades, the odds look good.
Sanctions escalate
BPC, meanwhile, reacted to EU sanctions by issuing a press release warning that these could have a widespread impact on global food security. This warning was summarily ignored by the US, Canadian and UK governments when they waded into the fray with a new list of sanctions on 9th August. In a coordinated move, one year on from the disputed election that heralded Lukashenko’s return to power, this trio imposed new restrictions on the Belarusian potash industry and its exports. These formed part of wider sanctions on the country’s technology and software, dual-use goods and technology, tobacco goods, petroleum products, financial services and aviation sector.
US-backed sanctions were of particular concern to BPC and its buyers. Their worries centred on the fact that the Lithuanian companies underpinning Belarusian exports, most notably the country’s railways, rely on US commercial banks for their transaction services. This made the ability of BPC to maintain the flow of payments to Lithuanian companies vital if it wished to secure continued access to the port of Klaipeda, ahead of the 8th December deadline for US sanctions coming into effect.
In comments reported by state-run newswire BelTA, a defiant president Lukashenko reacted by saying:
- “[The EU and Western powers] started inventing things, shot themselves in the foot, and now they want to prevent us from using their ports for shipping chemical potash fertilizers. Listen, we will deliver these volumes.”
- “We will load them in Murmansk, not a problem, and we will deliver them to China via the shortest northern sea route, it is our main market, and to India, the southeast. We have to find a way out of this situation now before we drive each other into a corner – but the ball is on the other side.”
Despite this rhetoric, for BPC’s customers and market observers, the following key questions remained unanswered:
If and when Lithuania’s Klaipeda port became unavailable, could Lukashenko hammer out an agreement with Putin to transport potash via train to Russian ports for export?
Would such a route offer the security of supply MOP buyers demand in a market that is experiencing decade-high prices?
Would the higher logistics costs of transport via Russia allow BPC’s rivals to offer more agreeably priced MOP to buyers?
The market has reacted to the uncertainty with global MOP price offers climbing ever higher as the above questions went unanswered. Indeed, at the time of writing, satisfactory answers are still awaited. To compound these difficulties, BPC itself was then specifically targeted by the US – having previously dodged the majority of sanctions which were instead placed on Belaruskali, the country’s state-run potash mining arm.
Washington takes aim
In early December, Washington announced it was imposing expanded sanctions on Belarus. Acting in co-ordination with Canada, the EU and the UK, the Biden administration took aim at the country’s officials and their defence, security and potash sectors.
This resulted in an additional 20 Belarusian individuals and 12 entities being designated for sanctions by the US Treasury’s Office of Foreign Assets Control (OFAC). These were targeted for their role in migrant smuggling into the EU, the ongoing crackdown on human rights and democracy, and for propping up the regime financially. The designations were in response to what OFAC called “blatant disregard for international norms and the wellbeing of its own citizens”.
Additionally, to reinforce the actions already being taken by partner countries, the US moved to stop new issuances of Belarusian sovereign debt in the primary and secondary markets.
“The US stands alongside its international partners and allies in imposing costs on the Lukashenko regime for its deplorable behaviour, including migrant smuggling. Treasury will continue to work with the international community to address the Lukashenko regime’s repression, corruption, and flaunting of internationally recognised human rights,” said Andrea Gacki, control director of the US Office of Foreign Assets. The US Treasury Department has set 1st April 2022 as the deadline for American companies to end their affairs with BPC. This covers BPC subsidiary Agrorozkvit and any other businesses in which BPC and Agrorozkvit hold a stake of more than 50 percent.
Now, as 2022 begins, neither BPC nor the Lukashenko regime have commented officially on how they intend to overcome looming sanctions. A situation that leaves the potash market on the precipice of massive, sweeping changes to long-established global supply/demand dynamics – and without a clear plan of action for dealing with these.
What next?
One day after the US sanctions were announced, a still defiant Belarusian government and its domestic supporters warned of the increased food prices that lie ahead “in all countries of the world”.
“The fifth round of sanctions can only benefit the countries that introduced them. And we understand that the US sanctions have no direct jurisdiction in the EU,” Andrei Strunevsky, an influential member of the Belarus House of Representatives told state-run newswire BelTA. Strunevsky is a former deputy mine manager at Belaruskali and a member of the country’s Standing Commission on Industry, Fuel and Energy Complex, Transport and Communication.
However, Lithuania’s government did act in response to international sanctions in mid-January by terminating the MOP transport contract between state-run Lithuanian Railways (LTG) and Belaruskali. Lithuania’s transport minister has said the existing contract will expire on 1st February, according to media reports. Also, to avoid potential loopholes, any attempts to transport Belarusian potash via other Lithuanian suppliers will require the approval of the country’s National Security Commission.
Adding to the pressure on Belarus, this news came only days after Yara announced it was winding down purchases of Belarusian MOP. The Norwegian fertilizer major said that sanctions have made it near-impossible to continue its longstanding, 26-year business relationship with Belarus.
An ‘interesting’ year
Despite the bluster and political manoeuvrings, the lack of any official announcement by the Belarusian government and state-run potash firms confirming future potash export arrangement has left buyers deeply concerned – especially given their need to secure tonnes in advance, with lead times from mine to field taking a month or more.
While BPC remains largely silent on the option of exporting via Russia, investors are buying into rival potash majors – and, in some cases, are throwing their lot in with smaller, upcoming potash market players too. Whatever happens, 2022 will certainly be an ‘interesting’ year for the global MOP business.
