March/April 2010

Feeding the food supply

Potash producers look to 2010 and beyond

By D. Zlotnikov

Whether you realize it or not, if you like to eat, you like potassium. It is, along with phosphorus and nitrogen, the building block of virtually all plant life on earth – and the basis of modern agriculture. If you’re Canadian, or better yet, a Saskatchewanian, you like the potassium compound potash most of all.

Saskatchewan is home to half of the world’s potash reserves. The three major operators in the province – Potash Corporation of Saskatchewan, the world’s largest producer, along with The Mosaic Company and Agrium Inc. – account for 30 per cent of the global potash market. The three export their product via a jointly owned subsidiary called Canpotex. Russia and Belarus market their product in much the same way, with Russian Uralkali and Belarusian Belaruskali as joint owners of the Belarusian Potash Co. (BPC). Among them, Canpotex and BPC are responsible for 70 per cent of the world’s potash exports.

Yet despite increasing global populations and what seemed to be a near-guaranteed long-term need for potassium fertilizer, 2009 was a dark chapter in the history books.

“2008 was a great year,” says Bill Johnson, PotashCorp’s director of public relations. “2009 was a lousy year.” Two years ago, potash spot prices crossed the $1,000 per tonne boundary, up from the $250 mark in late 2007, and 50 million tonnes of the product were sold. BPC and Canpotex both set their sights on the $1,000 per tonne starting price for 2009, just as the financial crisis rolled in.

Farmers watched grain prices sink fast. Faced with decreased grain demand on one side and record fertilizer costs on the other, many decided they could not afford the same rate of potash use they had maintained in previous years. Sales slumped sharply, forcing producers to decrease output in response, or risk further swamping the market with product. Russian producer Uralkali had cut its first quarter production from the original projection of 1.3 million tonnes to 459,000 tonnes, a 63 per cent drop. BPC, which markets Uralkali’s production, was forced to drop prices, announcing a 25 per cent drop to $750 per tonne in its March ’09 sale to Brazil.

Across the ocean, Saskatchewan was feeling similar pains. PotashCorp saw sales volumes drop by 86 per cent in North America and 78 per cent worldwide. In all, Johnson says, PotashCorp produced 8.7 million tonnes in 2008, but that figure slumped by more than 60 per cent in 2009, to 3.4 million tonnes.

Finding solid ground

Charles Neivert, head of agriculture and chemicals research at New York-based investment bank Dahlman Rose & Co., feels the situation was exacerbated by the length of time it took the producers to find a suitable price point.

“What was clear is that for a long time, the potash industry couldn’t find the price where people were buying. If you ask for a price and everyone says ‘Thank you very much, but no thank you,’ then you’ve got the wrong price,” he says.

The industry tried to cut production to match the decreased demand, an approach that had worked in the past. This time, the cuts had to be truly drastic.

“The cutbacks took the operating rates down to under 20 per cent of capacity at one point,” Neivert says. “Not a 20 per cent decrease, but under 20 per cent of capacity, in North America. And people still weren’t buying at that point. So the producers’ attempt to hold price at that point was just not working.”

But why did all the experienced players miss the mark, and why did a strategy that Neivert says has been successful on previous occasions fall short this time?

“There may have been a miscalculation with how much inventory was available in the system and how consumers would react to the high price and what they could do about it,” Neivert explains. “When you listen to the producers, they frequently talk about the inability of their customer base to do anything but continue to buy product.” Part of the problem with estimating the size of the existing inventories, Neivert adds, is that there is no such thing as a central potash repository.

“The producers may not have realized how much they’ve moved into the inventory chain. A lot of the supply is in the farmers’ fields. You only have soil tests and conjecture about how much potash or phosphate, which went through a very similar situation, is actually there.”

If the potash concentrations in the soil are built up over years of fertilizer use, he continues, then farmers have the option of using that build-up as a “bank” of sorts, supplementing their fertilizer use to varying degrees or replacing it altogether. The high price compelled them to draw from the soil reserves, explains Neivert, “which really cratered the buying.”

All that said, the demand slump is not likely to be permanent, or even long term, according to Johnson of PotashCorp. “Customers around the world lived off their inventories and reserves in 2009,” he says, “but you can only empty a warehouse once, and then you have to fill it again. I think they’re in a position now where they might not fill all these warehouses this year, but anything that goes into the ground will have to be purchased from the open market.”

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