Potash Sector Walking on Egg Shells as 2012 Approaches

Fertilizer demand throughout the first eight months of 2011 looked good, but the market has, if anything, turned somewhat gloomy and bearish since November.

The coming year in the potash space looks set to be volatile, somewhat uncertain and, really, kind of a precursor to the rest of the decade when more capacity – and more economic uncertainty – will no doubt materialize.

“Markets have generally been firm this year, with prices showing their highest levels since the peak of 2008, but this led to some fears that a re-run of the market crashes seen that year could be on the cards again, particularly with rising economic uncertainty,” according to the Saudi Gazette.

A domino effect – one that could come from an entirely different sector, failed currency or government – could wreak havoc on this or any other market. And quickly.

“The worsening eurozone crisis and broader economic slowdowns seen in developed countries worldwide has destroyed some European demand, and also had a knock-on effect on international currencies, decreasing purchasing power for major fertilizer users in markets such as Latin America and southern Asia,” the Gazette writes.

“Hesitant buyers, particularly in the US, have adopted conservative purchasing behavior, more akin to the post-crisis behavior seen in 2009, opting to buy on a hand-to-mouth basis.
“Fertilizer demand is expected to return, but buyers are not likely to step back in strongly until February and therefore prices will remain under pressure until then.”

According to the International Fertilizer Industry Association (IFA), forecasts for demand levels in 2012/2013 are highly speculative right now, thanks in large part to the depressed economic context in many developed countries.

However, global agricultural commodity prices remain attractive, driven by a disappointing US harvest and robust food, fuel and feed demand.

“Potash prices (FOB Vancouver) were flat in November at US$500 per tonne (+35% yr/yr). Canada’s largest producer is taking downtime in view of slower sales in Southeast Asia and a request to roll back 2012:Q1 contract prices in India, according to a December 21, 2011 Scotiabank report.

At the same time, potash capacity is certainly expected to grow over the next eight years, as are other key nutrients in the agricultural space.

“By the end of 2012, an expected additional 4m tons of annual granular urea capacity is due to come online and the market will be oversupplied, which will no doubt help keep prices at lower levels than seen over the past year,” according to the Saudi Gazette.
“Qatar Fertilizer Co. (Qafco) is scheduled to start up its 1.3m ton/year Qafco V urea plant in January 2012, and then a second 1.3m toe/year Qafco VI plant in the fourth quarter of 2012. 
“Additionally, in Algeria, Sorfert is due to start up a 1.1-1.2m ton/year plant in the first quarter of 2012, and MOPCO in Egypt is due to start two 660,000 ton/year plants in the second half of the year. Additional capacity is also due on-stream in Vietnam and Venezuela.”

At the same time, India may re-introduce state controls on retail prices of some fertilizers after soil nutrient rates almost doubled in the past nine months, Srikant Jena, the junior fertilizer minister said, according to a Bloomberg report.

“We are considering various options to bring down prices of di-ammonium phosphate and muriate of potash fertilizers,” Jena said in an interview in New Delhi. “Price control could be one of the options.”

Potash prices in India have surged to 11,300 rupees ($213) per ton from 5,055 rupees in March and di-ammonium phosphate to 18,200 rupees a ton from 10,750 rupees, according to data from the Fertiliser Association of India.

Fertilizer consumption in India, the world’s third-largest potash importer, may tumble for a second year as rising prices of the soil nutrients deter farmers, U.S. Awasthi, managing director of Indian Farmers Fertiliser Cooperative Ltd., which represents 55 million farmers, said on Dec. 5.

Consumption of di-ammonium phosphate and potash may drop as much as 35 percent in the year starting April 1, compared with normal use of about 15 million tons, the junior minister said.

In some respects, all of this is a moot point if the various economic regions continue to implode, placing downward on fiat currencies and – ultimately – demand, especially if farmers can’t get credit or fund purchases.

The upshot: farm fields will go wanting, yields will come under pressure and the big potash producers will have to sit back and balance what it can ask for in the market and what end-users are willing to pay.

Classic Economics 101, but the stakes seem somewhat higher this year, a year where people are growing increasingly cautious and worried about how this or that domino may or may not affect what has always been a cyclical potash sector.

Watch this space – 2012 will be an interesting year. Fingers crossed that it will be interesting for all the right reasons – not the wrong ones.

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