This report is based largely on two presentations by PotashCorp’s CEO – Jochen Tilk – which are: “Goldman Sachs Basic Materials Conference” of May 18, 2016 here ; and “BMO Capital markets Farm to Market Conference” May 19, 2016 here.
Why do I use these? Well, PotashCorp is basically the provincial leader in potash – that’s why.
State of the market
- Prices have bottomed out
- The U.S. market had been a premium market for potash; it opened up at $410 Midwest prices and then ended up almost $200 below that 12 months later and the premium had all but disappeared, a significant amount of imports had come in
- Brazil became more spot price and lower
- The Chinese have a lot of inventory so negotiations have prolonged, but that also means producers are settling easy for low prices (a country consumes approximately 15 million tonnes of potash, 25% of the world potash consumption of 50 or 60 today, and it domestically produces half of that 7 million to 8 million and then it imports the other half)
- Inventory has been flushed from system
- Farmer economics are good in the USA – better than last year and much better than the year before
- Brazil crops look good and they use US $d
- Global maximum production is 65-million tonnes with demand at 58-61 million tonnes
- Consumption to grow by approximately 2%, maybe 2.5%. So by 2020, it would be approximately give or take 70 million tonnes.
- Incremental capacity growth such as a project by K+S, Legacy, and there’s a European Russian producer, EuroChem. And we incorporate that and some other gives or take.
- Some capacity coming off line – about 7-million tonnes
- So in 2020, we are in a situation where the margin between operating capacity and consumption is about 5 million tonnes, 78 to 75.
- They will be the lowest cost producer on earth – Rocanville starts at about $70 U.S., and eventually gets to $45 or $50 for cash costs per tonne of production
- My thought going forward, “PotashCorp – being the lowest cost producer in the world and thus able to accept a lower floor price for potash – could therefore switch from ‘swing producer’ to run full-out all of the time and let others be the swing producer” for the US markets. But, they would still need to work with their partners in Canpotex for off-shore markets, and their partner’s production costs are higher, so this strategy may not work off-shore. Yes, they could dissolve or pull-out of Canpotex, but Canpotex is a massive and valuable collection of infrastructure with rail cars, ports, ships, warehouses, and sales staff.