While global potash (K) fertilizer prices have been at their highest levels in the last three years due to cutbacks in supply, the outlook for the market is for more capacity than new demand. Potash producers with smaller, higher-cost production facilities will likely come under heavy cost pressure.
Humphrey Knight, Potash Analyst for CRU International Ltd. in London, told attendees of the 2018 Fertilizer Outlook and Technology Conference recently in Jacksonville, Florida, that things really began to change in the potash market since about mid-2016. This is when potash became more affordable and thus led to record 2017 global demand.
GLOBAL K INCREASING
Global potash imports in 2016 totaled 61.4 million metric tons (mmt), then jumped to 66.6 mmt for 2017 imports. The U.S. even increased its imports, to just under 10 mmt, with a strong second half of 2017, he said.
Knight said, of that nearly 10 mmt in 2017, 7.7 mmt was imported from Canada, which is about a 12% increase year-on-year from there. Another 1.9 mmt was imported from overseas (mainly Russia, Belarus and Israel), which was a 44% year-on-year increase.
U.S. potash demand in 2018 is shaping up similar to 2017 with more demand for potash.
Knight said U.S. potash applications on corn increased by 24%, while soybean application climbed 18% from 2012 to 2017.
“Fall application pushed 2017 demand to a record high, with 2018 demand currently following closely,” Knight said.
Potash demand growth is set to steadily increase over the next five years across the world, Knight said. Global demand in 2018 should be around 66.8 mmt, and by 2023, demand could be closer to 76.8 mmt. This would be a compound annual growth rate of 2.8% per year during this time period.
The global growth in demand is mainly thanks to two different regions of the world: Asia and Latin America.
CHINESE POTASH NEEDS
Knight said China produces enough potash to meet about half of its domestic demand, while the other half is imported. While nitrogen and phosphorus fertilizer production in the country faces scrutiny from increasing environmental regulations, these issues do not affect the Chinese potash production because they get it from underground mines.
Despite this, the country’s domestic capacity appears to have reached a limit, about 16 mmt in 2017. CRU is no longer aware of any further investment in new or expanded potash capacity in China, he said.
“Because of this, imports are becoming more important in China,” Knight said.
Chinese farmers are applying more potash to improve the quality of crops in the country, especially fruit and vegetables. Nitrogen and phosphorus are generally over-applied in the nation while potash is under-applied, he said.
Other than China, southeastern Asia oil palm areas (Malaysia and Indonesia) are expected to expand potash usage.
Latin America is also increasing potash demand as the region expands mainly in soybean production. Lower-yielding soybean areas provide potential upside to the potash market, he said.
SEVERAL SUPPLY ISSUES
On the supply side, Knight said, potash producers have attempted to limit supply since about 2013, when companies in Canada enacted voluntary idling of facilities. However, from that time until 2017, the lower capacity really did not improve potash’s global price until 2017.
In 2017, Canadian producers have maintained supply discipline. Canada, as well as the rest of the world, have had operating rates close to their customer demand, which ends up being positive news for prices, he explained.
In addition, new capacity projects across the world have been slow to start. Knight said Russia could see another 7 mmt of production as two facilities increase capacity.
A facility in Saskatchewan, Canada, started production in June 2017, but had some issues with product quality early. This plant is expected to produce 1.4 mmt to 1.5 mmt in 2018, with no exports from it to the U.S. expected until 2019, he said.
The slowness of new production can be traced directly to increasing site costs, which have been rising since 2016.
Knight said site costs have been highest in Russia and Belarus. The recovery of the Russian ruble versus the U.S. dollar, as well as 30% higher energy and labor costs, have increased site costs by 23%.
“Margins are very tight at these locations,” he said.
Canada’s site costs increased by 12%, thanks to higher energy and labor costs, but at least these facilities have capacity increasingly concentrated in lower-cost mines, he said.
Knight said mines in Europe have site costs rising by 17% because of much higher energy costs. These mines tend to be smaller in size and also have falling grades of product, he said.
Future supply will arrive, but it will be later in the five-year window than once anticipated by the industry, he said. All additions from 2008 to 2017 were additions or expansion projects at existing facilities.
Going forward, however, most of the new potash supply will come from new facilities, Knight said. With these new plants set to come online in the coming years, about 16 mmt of new capacity could be seen, which will be a challenge for the industry.
“This is massive new supply for an industry which would have 16 mmt of new capacity and only about 10 mmt of demand,” Knight said.