The Phosphate And Potash Outlook For 2015
We begin 2015 in a much different economic environment than one year ago. No one knows how plant nutrient markets will play out because of the unpredictable factors that impact these markets, but here are some of the key drivers that we expect will determine the outlook.
Agricultural Commodity Prices
Prices for the main grain and oilseed crops staged strong rallies last October. Since then, prices have traded within higher ranges that have improved market sentiment and underpin positive plant nutrient demand prospects this year. Now the question is whether markets can hold these values throughout 2015.
Bulls argue that they can. In their view, agricultural commodity prices bottomed in September, and markets are looking ahead at improved fundamentals. Strong demand-pull pressure — especially due to outstanding feeding economics — is the main driver. In addition, a smattering of developments elsewhere such as the drought in Australia and Russian export restrictions also support the bullish tone.
Bears argue that the recent rally likely will prove a dead cat bounce. In their view, projected grain and oilseed inventories at the end of the 2014-15 crop year still will climb to the highest level in 15 years, even after all the tinkering with production and use estimates. They point out that Brazil is growing another record soybean crop with recent estimates in the 95 to 96 million ton range, up from the record harvest of 86.7 million tons last year. They also expect that the strong U.S. dollar eventually will pressure agricultural commodity prices, and that something will spook the speculative herd that has built net long positions in several agricultural commodities.
Statistical reports released by the USDA likely will not settle the debate just yet, although prices traded off following their release. The numbers confirmed that growers are expected to add about 42 million tons of grain and oilseed crops to global inventories this year — mostly corn and soybeans and mostly in the U.S. and Brazil — and that projected stocks at the end of 2014-15 will climb to the highest level since 1998-99.
Agricultural commodity prices can move quickly thanks in large part to Mother Nature. But absent a shock later this year such as the severe drought in 2012, the most likely scenario, in our view, warrants a cautious outlook for ag commodity prices this year.
Transportation & Logistics
Another key issue is whether the long shipping delays that occurred in 2014 will repeat this year. Atlantic storms produced 30-foot swells that shut down phosphate (P) exports from the large Jorf Lasfar complex in Morocco for several weeks during the first quarter of last year and helped to ignite the jump in P prices. In North America, rail car and power shortages delayed potash (K) shipments from Saskatchewan mines, causing production curtailments due to full warehouses at one end of the supply chain and stock-outs and missed sales at the other end.
In North America, the demand for rail services is increasing at a rapid rate due to the recent growth in container, oil, ethanol, coal and grain shipments. As a result, railroads are struggling to keep up with trend growth let alone meet peak seasonal demands in these sectors.
Producers and distributors are making adjustments to these structural changes in order to keep product moving at a more consistent rate through this supply chain. Many North American distributors began to fill K bins for fall application immediately after the spring season last year. And many distributors refilled sheds right after last year’s below-average fall season based on expectations for an especially strong peak season this spring. In addition, lower oil and ethanol prices as well as a smaller Western Canadian harvest may bleed some of the pressure out of rail demand. As a result, there are hopeful signs that rail performance this year may be less dreadful than a year ago.
Other P Swing Factors
A few other factors are expected to influence the direction of the global P market this year. First, our demand forecasts bank on India for about one-half of projected increase in global shipments this year. India is always a wild card, but, by our math, the country likely will need to import close to 1 million more tons of finished P products this year, and the government has the wherewithal to make import economics work.
Second, Chinese exports are another swing factor. Based on customs statistics through November, we estimate that Chinese producers likely exported 7.3 to 7.5 million tons of finished P products last year, up more than two million tons from a year earlier. Chinese exports are forecast to remain at or near this record level in 2015, but a larger share is expected to move into India with a smaller share moving into more distant destinations such as Brazil and even the U.S. In addition, recent changes in China’s export tax policy are expected to facilitate a more orderly flow of exports and reduce price volatility.
Finally, the cost of raw materials — namely sulphur and ammonia for integrated producers — also will impact finished P prices this year. Sulphur prices remained elevated at the start of 2015, but ammonia prices had dropped from $655 tonne in November to $545 in January and a further decline was expected in February.
Other K Swing Factors
In the case of K, swing factors mostly are on the supply side of the ledger. Global Muriate of Potash (MOP) shipments surged possibly more than five million tons last year. Producers in the former Soviet Union (FSU) notched production up a gear or two while North American producers drew down large inventories in order to meet this surge.
In particular, Uralkali recently reported that it produced a record 12.1 million tons KCl last year, up 2.1 million tons from 2013, despite the halt in production due to a water inflow at its Solikamsk 2 mine in late November. Belaruskali also reported that it produced a record 10.3 million tons in 2014, up from 7.1 million tons last year. In North America, stocks held by producers at both on- and off-site warehouses peaked at 3.19 million tons KCl on January 31, 2014, before plunging 54% or 1.71 million tons during the next eight months to just 1.48 million tons on September 30, 2014.
Global shipments are projected to increase moderately in 2015 with most of the gain in coming from Asia. However, several supply uncertainties exist this year, especially in the FSU. The downside supply risk includes the potential loss of the 2.5 million ton Solikamsk 2 mine. In addition, FSU mines ran extremely hard last year and likely are in need of maintenance turnarounds. Finally, cupboards are low if not bare in North America as well as in a few other regions so these producers do not have large inventories to meet projected demand.
The upside risk largely is due to the collapse of exchange rates and the strong incentive to keep mines operating in high gear in the FSU. In addition, Uralkali likely can make up part of the potential loss of a flooded mine by lifting more ore at the other two shafts and refining it at the Solikamsk 2 mill. Finally, a few North American brownfield expansions including the Agrium Vanscoy and Mosaic Colonsay projects were completed last year.