According to the company’s website news release on February 21, 2023, the tragic events in Ukraine have left an indelible imprint on the global commodity markets. The immediate impact on potash was larger than most – and the reverberations of the history–shaping events we are living through will certainly continue for years, and plausibly, perhaps decades.
The good news for global food security is that the worse–case scenarios whereby a physical shortage of fertilisers materially held back crop production did not occur. Fertiliser prices have since receded to levels where farmer affordability is looking more reasonable again. Worldwide Google searches for “food crisis” peaked in May–2022 at a level 30% below the search traffic seen amidst the global food crisis of 2007/08 (something we touched on here). As of February–2023, search traffic has halved since the May–2022 peak.
Looking at price developments by region, the timing and speed of descent from the peak has varied greatly. According to assessments in CRU’s Fertilizer Week, the price of gMOP20 into Brazil opened the second half of calendar year 2022 at $1,025/t CFR and closed the year at $515/t. gMOP into the United States (at NOLA), which initially led the global rally before ceding that place to Brazil, opened the second half of calendar year 2022 at $813/t FOB Barge, and closed the year at $527/t. Spot prices for sMOP in South–East Asia opened the second half of calendar year 2022 at $938/t CFR, but by calendar year end were sitting at $540/t. Annual contract prices with China and India were set at $590/t CFR in February–2022, and they held through the period. Expectations for calendar 2023 are between $460/t and $480/t.
Realised prices for producers tend to reflect developments in prompt benchmark pricing with a lag that is partly dependent on the perpetual dance between prompt and fixed price contract markets. During the fly–up phase, a producer with higher gMOP exposure in the Americas enjoyed vastly superior pricing to a producer geared more towards sMOP under annual contract into Asia. As the scarcity prices rolled over and began to submit to gravity, they converged quite swiftly on the contract prices. In early calendar 2023, each of the prompt markets was trading below the $590/t contract price threshold.
We estimate that approximate realised prices for Canadian producers (FOB Vancouver equivalent) as of mid–January 2023, were just short of $490/t. The peak was around $780/t, achieved in the months immediately following the invasion.
Turning to the major consumption regions, Brazil, the most reliable growth destination in recent years, recorded an import volume decline of –8% YoY in calendar 2022. Six months ago we flagged that the strength of Brazilian imports in the aftermath of the Ukraine conflict had a non–commercial feel to it, especially in the context of declining affordability. Our exact words were “It seems likely that some of the growth in Brazilian imports in the last two quarters was purely precautionary as a hedge against a sudden stop in the availability of FSU product.” When the sudden stop never came (for Russian product at least), the Brazilian value chain found itself awash with inventories, with storage at full capacity. Demand accordingly dried up, and in the thin liquidity prices began an inexorable descent. With CFR Brazil now roughly half of its peak level, soybean MOP affordability is back close to long–run average. That normalisation, and a rundown in stocks post the second (Safrinha) corn planting, portends a return to more normal buying behaviour across the year in calendar 2023.
The US took the opposite approach to their Brazilian competitors. Rather than stocking up, they backed right off and never really returned in scale. Shipments were down by –26% YoY in calendar 2022. US corn MOP affordability is now better than average, and farmers who took the risk on a “potash holiday” last year for economic reasons should be back in the market at some point this year.
Imports into China (+4% YoY calendar 2022) and India (–14% YoY Jan–Nov) were mixed. With domestic production weak, and imports not flowing under stale contract pricing, the Chinese government released some of its strategic reserve late in calendar 2021. Releases continued throughout 2022 despite an uplift in domestic production. Uniquely among the major importing regions, China saw the share of its imports from Belarus hold steady at typical levels in calendar 2022.
We do not have visibility of the terms under which Russian and Belarusian exports made their way to China in calendar 2022, but it would be a surprise if they were not preferential to the buyer, especially for otherwise stranded Belarusian product.
For India, the weak –14% YoY outcome was partly a function of supply availability: there were no imports from the FSU recorded after May. India and Belarus had been coming closer together in the years leading up to the sanctions, which was illustrated by the signing of what were widely seen as below–market contracts (from the producer perspective). Belarus provided 31% of India’s imports in calendar 2021, versus just 5% for Russia. India was thus in a more difficult position than most when Belarus lost port access in Lithuania – and India is presumably as eager as anyone to see Belarus establish a sustainable port solution. South–east Asian imports have also declined by –14% YoY, with the full year now estimated to reach 6.5 Mt.
Getting away from temporary adjustments in trade flows and logistical issues, how will the new geopolitics of the FSU impact upon the potash industry in the longer run? The most honest answer is that it is too early to tell. The secondary answer is that at a minimum it is reasonable to expect a delay of some years from the original timetable for new mines in the FSU.
The careful pre–Ukraine calculus that helped motivate our Jansen stage 1 decision was partly based on a ~5 Mt FSU project pipeline in the 2020s. With obvious risks pertaining to both the timing and ultimate delivery of those projects now, our position is under dynamic review.
A material delay or non–arrival of a portion of these tonnes creates either an earlier balance point for the market, or a potential reshuffling of the theoretical inducement queue, with non–FSU latent capacity released, non–FSU projects coming forward and FSU projects moving backward.21 Or some combination of these options whereby some of the space vacated by the FSU is captured elsewhere, but perhaps not to the point where it prevents the balance point being achieved sooner than previously expected.
It is important to note here that this would not change the real long–term price we have in mind – but it could alter the timing by which it emerges as a durable trend. There are many, many possible permutations here, and against this backdrop it is strategically prudent for us to accelerate studies of our own capital–efficient organic options beyond Jansen Stage 1, as we have stated in other fora.
Beyond the balance point, with the market very likely to continue expanding in the following decades, our views on the most likely operating environment for the industry in the 2030s and beyond – an extension of what we have dubbed the “4th wave” of the potash industry – is a durable inducement pricing regime centred on solution mining in the Canadian basin. Accordingly, Canadian greenfield solution mines, which tend to have higher opex, require more sustaining capex and consume more energy and water than conventional mines, have been expected to set the industry’s long run trend price. We estimate that a price in the high $300/t to low $400/t range would be required to incentivise a material portion of Canada’s solution mining “supply bench” into production. That is somewhat higher than our estimate at the time of the Jansen stage 1 decision.
Higher carbon pricing should amplify the operating cost advantages of conventional mining vis–à–vis the solution mining method, steepening the operating and inducement cost curves. And depending on just how high the carbon price goes, there is a threshold above which the solution mining bench could lose out to a set of higher–cost conventional operations spread out around the world. In this scenario, rather than having a deep bench of archetype projects setting LRMC for the industry, the shoulder of the cost curve could eventually look more like copper’s, where greenfield projects jockey for position with ageing, and/or lower–grade and/or sub–scale assets between the 90th and 100th percentile.
Longer–term, we see potash as a future facing commodity with attractive fundamentals. Demand for potash stands to benefit from the intersection of global mega–trends: rising population, changing diets and the need for the sustainable intensification of agriculture.
That latter point includes both the need to improve yields on existing land under cultivation, in the face of depleted native soil fertility, but to also begin factoring in the long run land–use implications of large–scale biofuel production, giga–industrial scale renewables and nature–based solutions to climate change. To be clear though, the impact of deep decarbonisation on potash demand is best characterised as attractive upside on top of an already compelling demand case: not a case in itself.
Something else that attracts us to conventional potash mining and processing is that it has the lowest upstream environmental footprint among the major fertiliser nutrients, and beyond the mine gate potash does not generate some of the negative environment impacts associated with excessive application of nitrogen and, to a lesser extent, phosphorus. The major issues here are leaching into and polluting waterways and the release of GHGs in the application process. Excess nitrogen and phosphorus flows to the biosphere and oceans have been identified as critical “planetary boundary” parameters.
