If the old adage that “the cure for low prices is low prices” holds true, then phosphorus (P) and potash (K) markets should be feeling a little bit better in 2017. As the chart shows, these markets have had a strong dose of low prices during the past two years, and lower prices are bringing supply and demand into alignment.
Potash — Fundamental Adjustments
The New Orleans (NOLA) barge price for blend grade muriate of potash (MOP) continued to trend down through the middle of 2016. The price bottomed in the low-$170s per ton in July, a massive drop of $200 since the start of 2015.
On the supply side of the equation, the $200 price drop resulted in the cure killing high cost operations and, based on 2016 earnings reports, inflicting painful side-effects on low cost producers. In North America, all of the facilities that were at the right end of the industry cost curve have closed. These include Mosaic’s Carlsbad and Hersey mines, Intrepid’s Carlsbad East (converted to potassium-magnesium-sulphate production) and West operations, and PotashCorp’s Penobsquis and Picadilly facilities in New Brunswick and part of its Cory operation in Saskatchewan. We estimate a net loss of 3.1 million tons of annual MOP capacity from the permanent closure or reconfiguration of these seven facilities.
Mine closures as well as the optimization of remaining operations resulted in a large decline in output last year. For example, North American MOP production was down 2.3 million tons KCl during the first three quarters of 2016, according to the most recent The Fertilizer Institute (TFI) statistics. Other producers also scaled back production in response to low prices and full warehouses. Russian producer Uralkali reported in October that production during the first three quarters of 2016 was down 800,000 tonnes from a year earlier.
On the demand side of the equation, lower prices have underpinned strong on-farm demand. In North America, we estimate that shipments from producers and importers during the last half of 2016 were up 15% to 20% from both a year earlier and the seven-year Olympic average for this period due to the long fall application window as well as a favorable ratio of crop prices to potash costs. Reports from our sales team indicate that application rates held steady in most cases and were up in others as some farmers built soil potassium levels given the low cost of potash.
Outside North America, uncertainties caused mainly by delays in settling 2016 contracts with Chinese and Indian buyers resulted in a bunching of shipments during the last half of the year. For example, Canpotex announced in October that it was sold out for the year, and shipments during the last half of 2016 topped the previous high-water mark for this six-month period by 25%.
The combination of lower production and a surge of shipments drained producer inventories during the third quarter. The most recent TFI statistics show that inventories held by North American producers at on- and off-site warehouses dropped 50% from a near-record 4 million tons KCl on June 30 to just 2 million tons on September 30. Stocks on September 30 were 14% less than the seven-year Olympic average for this date. We estimate that producer inventories likely declined a bit more by the end of 2016 given the long tail to the North American fall application season, the bunching of Canpotex shipments, and curtailed operations such as the temporary shutdown of our Colonsay mine.
A Look at Price
Price provides the best read-out of the impact of these fundamental changes. As noted above, the NOLA price bottomed in July. Since then, the barge price has climbed almost $40 to about $210 per ton at the start of 2017.
We expect that this momentum will carry over into this year for four reasons. First, channel inventories finally have been pulled down to normal or even below-normal levels in most geographies as a result of continued strong on-farm demand and declines in producer shipments during the last two years.
The second is a corollary of the first. Global MOP shipments are forecast to increase 4% or 2.5 million tonnes this year, the first increase since the nine-million-tonne surge in 2014. On-farm demand remains strong, and producer shipments will need to closely match projected use this year given lean channel inventories worldwide. All of the big six consuming regions — North America, Brazil, China, India, Indonesia, and Malaysia — are forecast to post gains, and Canpotex announced in early January that it already is fully committed through the first quarter.
In North America, MOP shipments are forecast to rebound 4% to 9.9 million tons KCl in 2016-17 following a drop of 8% to 9.5 million 2015-16. Our forecast assumes that U.S. farmers will plant 91 million to 92 million acres of corn, 85 million to 86 million acres of soybeans, and 48 million to 49 million acres of wheat this year. Application rates are expected to remain steady on corn, soybeans and other crops due to large withdrawals this year and the low cost of replacing or even building soil potassium levels.
Third, significant capacity has come off-line during the last two years. As highlighted above, 3.1 million tons of MOP capacity has closed permanently in North America. Outside North America, ICL likely will cease MOP operations later this year as it accelerates the transition to polyhalite production at its Boulby mine in the United Kingdom.
Finally, we do not expect material supply increases from either brownfield expansions or greenfield projects in 2017. In January, Canpotex announced a new option for proving new capacity that does not require a 90-day blow-out production run. The new option estimates capacity based on an engineering certification that requires 10 to 14 days of normal operations. Finally, we do not expect material tonnage from new greenfield projects this year. In particular, we expect no tonnage from the EuroChem projects in Russia. K+S has indicated that its new Legacy project is expected to produce about 700,000 tonnes this year. The market will begin to bet the over/under soon.
Phosphate — All Eyes on China
The chart shows that the NOLA barge price for diammonium phosphate (DAP) also has trended down during the last two years. The price dropped to less than $290 per ton during the fourth-quarter, down $150 per ton from the first quarter of 2015. Much like potash, low prices are driving significant changes in the global phosphate market, but most of the adjustments are taking place outside North America.
Low prices are accelerating the widely expected restructuring of China’s large and cost-diverse phosphate industry. Plans outlined at the National Phosphate and Compound Fertilizer Industry Annual Conference in May called for the permanent closure of “outdated” facilities with capacity of 3 million tonnes P2O5 or the equivalent of 6.5 million tonnes DAP by the end of this decade.
Recent statistics and news reports indicate that a restructuring is underway. Production and exports declined last year in response to both lower prices as well as the recent government crackdown on excessive emissions of air and water effluents. Chinese Customs statistics through November showed that exports of the leading phosphate products were down 20% or 2.1 million tonnes from the record volume a year ago. The government reported that 70% of Chinese phosphate producers lost money last year, and YTH, one of the big four phosphate producers, reported a loss of more than $230 million during the first three quarters of 2016. So, lower prices are forcing cutbacks in output.
In addition, some producers have shut down as a result of actual or expected environmental audits, and the only remedy for some facilities may be permanent closure. The Chinese government is becoming increasingly responsive to the public’s demand for improved air and water quality.
Price again provides the best read-out of the impact of these developments. The DAP price for China port was trading in the $330 per tonne range at the beginning of 2017, up about $40 per tonne from just a couple months earlier. Lower production combined with a take-off of domestic shipments and higher raw materials costs fueled the strong gain — despite the elimination of a $15 per tonne export tax on January 1.
On the demand side of the equation, low prices are fueling broad-based demand growth. Global shipments of the leading phosphate products are projected to climb to 66 million to 68 million tonnes this year, up 2.3% or 1.5 million from an estimated 65.5 million tonnes in 2016.
Demand continues to march upward in Brazil. Our Sao Paulo team now estimates that total fertilizer shipments jumped to 33.9 million tonnes in 2016, up more than 12% or 3.7 million tonnes from 2015. Shipments are forecast to eclipse 35 million tonnes this year. Shipments of high analysis phosphate products are projected to climb to a record 7.9 million tonnes this year, up from an estimated 7.6 million in 2016 and 6.9 million in 2015.
In India, DAP shipments and imports are projected to rebound in 2017 following declines last year. Strong movement during the current Rabi season is expected to flush the pipeline and set the stage for a recovery this year.
While Brazil and India typically capture the headlines, several other regions such as Africa, Argentina, Central America, the former Soviet Union, Pakistan, and Southeast Asia registered impressive gains last year and are projected to post further increases this year. For example, Argentine imports through November were up a whopping 90% from a year ago. Pakistan, Thailand, and Vietnam each set phosphate shipment records last year. In Russia, plant nutrient demand is booming along with agricultural production thanks to the combination of generally favorable weather and a depreciated ruble. Demand also appears to be taking off in parts of Africa due to the development efforts of Moroccan producer OCP.
In North America, shipments are forecast to increase 2% to 9.8 million tons in 2016-17 despite a small projected decline in on-farm use due to much lower channel inventories. Shipments during the second half of 2016 were up about 5% from a year earlier so this forecast looks achievable.
Factors to Watch
Several factors could move markets higher or lower this year. The first is crop prices. A big Southern Hemisphere crop followed by a good start to the Northern Hemisphere growing season likely would cause a step down in crop prices and dull P&K demand prospects later this year. However, a severe drought this summer, similar to the one in 2012, would quickly tighten global grain and oilseed markets.
The second is the much anticipated start-up of new P&K capacity this year. The market will closely monitor when projects start up and how quickly production ramps up. In the case of K, only the K+S Legacy project is expected to start up and deliver material tonnage this year. In the case of P, OCP is scheduled to commission its third and fourth phosphate hubs at Jorf Lasfar sometime in 2017, and the Ma’aden Wa’ad al Shamal Phosphate Co. joint venture in Saudi Arabia also is expected to start up later this year.
Finally, key exchange rates and other macroeconomic and political factors could impact P&K markets in different ways this year. For example, the Russian ruble tends to follow oil prices, so further gains in oil prices and a stronger ruble would boost the dollar cost of Russian P&K exports. A widely expected drop in the Chinese RMB, however, would reduce the dollar cost of Chinese P exports.