Industry Trend Analysis - Potash Mining: Subdued Price Outlook To Favour Low-Cost, EM Producers - AUG 2017

BMI View: Global potash production will edge higher in the coming years, as low-cost producers look to gain market share following the bottoming out of prices in 2016. Rising p roduction capacity will keep the market in oversupply in the coming years.

The global potash industry, used predominantly as an agricultural fertiliser, will experience a limited recovery as a subdued price outlook and fragmented competitive landscape continues to weed out inefficient producers. Countries with weak currency outlooks and state-backed potash companies, such as Russia and Belarus, will continue to gain global market share while higher-cost producers in countries such as Canada will continue to prioritise cost-cutting.

Producers In Low-Cost Countries To Gain Market Share
Select Countries - Mined Potash Production (mnt)
Source: USGS, BMI

Low-Cost, Export Oriented Operations Benefit Eastern European Producers

Currency weakness in Russia and Belarus, the second and third largest producers globally, will provide a tailwind to potash miners by lowering input costs. We expect Russian rouble weakness to persist over the coming years, averaging RUB58.5/USD in 2017 and rising to RUB65.4/USD by 2021. Similarly, the Belarusian rouble will continue to depreciate, averaging BYR2.1/USD in 2017 and BYN2.5/USD in 2021.

Currency Weakness To Boost Competitiveness
Select Countries - Exchange Rate (local currency/USD), ave
f = BMI forecast. Source: Bloomberg, BMI

While the 2013 dissolution of the cartel between Russia's and Belarus's top potash producers, Uralkali and Belaruskali, respectively, has been a key reason for potash price weakness since, both firms will remain competitive in a subdued price environment and well-positioned to export to key Asian markets, namely China and India. For instance, in July, Uralkali secured a potash import contract with China for USD230/tonne, a slight improvement from USD219/tonne in 2016. In Q117, Uralkali increased potash production by 15.4% y-o-y to 3.0mnt. The firm's exported shipments accounted for 84.6% of total revenues in 2016, of which approximately half went to EM markets.

Price Recovery To Be Limited Without Coordinated Effort
Green Market Fertiliser Potash Cornbelt Granular Spot Price (USD/short tonne)
Source: Bloomberg

Our view for developed market companies to focus on consolidation to try to increase weak earnings through synergies has played out well, exemplified by the merger between Canadian potash giant PotashCorp and Canada-based Agrium, which will create a new firm, Nutrien, with an estimated market capitalisation of nearly USD30bn when completed in Q317 ( see ' Fertiliser Market Outlook: Low Prices To Benefit EM Producers ' , December 14 2016). A key priority of the deal is to generate an expected USD500mn of annual operating synergies. For instance, in Q117, PotashCorp reported lower average manufactured cost of goods sold to USD90/tonne, from an elevated USD128/tonne in the same period of the previous year. In comparison, Uralkali averaged cash costs per unit sold of USD35/tonne in 2016. After completing the multi-year potash expansion programme in 2016, Potash will keep spending low and maintain the option to ramp up output with a 10.1mnt capacity in the event of stronger-than-expected global demand.

Lower Margins For Western Firms
Select Potash Miners - Profit Margin (%)
Est = Bloomberg estimate. Source: Bloomberg, BMI

New Capacity Ramp Up To Keep Market Well Supplied

After having stagnate or declined over the 2014-2016 period, potash production is likely to re-embark on a slow expansion phase in the coming years, bolstered by ongoing capacity additions in North America and Eastern Europe.

Over recent years, producers - especially those that have not benefited from depreciated currencies - have permanently closed high-cost facilities and are running lower-cost operations at steady rates to reduce unit costs and compete profitably in this new market environment. For example, Mosaic closed its Carlsbad and Hersey mines, Intrepid Potash closed its Carlsbad West operations and PotashCorp closed or suspended its Penobsquis and Picadilly facilities.

Along these closures of higher-cost operations, producers are developing low-cost projects. As such, looking ahead, North American producers' strategy will continue to focus on cost-containment and on the production of higher-value specialty products. Intreprid Potash is reconverting its Carlsbad East operations towards the production of premium potassium magnesium sulphate (KMS). In terms of capacity addition, in 2017, PotashCorp the expansion of the Rocanville mine in Canada, which now has a capacity of just under 6mn tonnes, compared with 3mn tonnes before the expansion started in 2008. K+S's Legacy project in Canada (renamed Bethune and which cost in total USD3.6bn to develop) began marketable production in 2017 and will ramp up production in the coming quarters.

In the longer term, additional capacity and competition in the potash market will come from top diversified miner BHP Billiton which is developing the USD4.7bn Jansen potash project in Saskatchewan. The firm expects the mine to produce 4.0mnt of potash per annum starting in 2023.

Top Producers Hold Significant Reserves
Select Countries - Potash Reserves (mnt) & Mined Potash Production (kt), 2016
Source: USGS, BMI
Potash Producers - Key Financial Data, 2016
Company Country Revenue (USDmn) EBITDA (USDmn) Net Income (USDmn) Capex (USDmn) Profit Margin (%) Net Debt/EBITDA
na = not available. Source: Bloomberg
Agrium Inc Canada 13,665 1,716 592 724 4.3 2.8
Mosaic Co/The US 7,163 1,030 298 843 4.2 3.8
Israel Chemicals Ltd Israel 5,363 403 -122 632 -2.3 7.4
Potash Corp of Saskatchewan Inc Canada 4,456 1,277 323 893 7.2 3.3
K+S AG Germany 3,826 677 193 1,331 5.0 5.1
Uralkali PJSC Russia 2,278 1,183 1,427 317 62.6 4.6
Sinofert Holdings Ltd Hong Kong 2,253 -614 -698 42.8 -31.0 na
Sociedad Quimica y Minera de Chile SA Chile 1,939 698 278 131 14.3 0.4
Qinghai Salt Lake Industry Co Ltd China 1,479 334 51.4 500 3.5 na
Arab Potash/The Jordan 522 115 95.1 7.9 18.2 -3.6
Intrepid Potash Inc US 211 -15.1 -66.6 17.9 -31.6 na
IC Potash Corp Canada 0.0 -3.2 -46.4 3.2 na na
Sirius Minerals PLC Britain 0.0 -16.0 -31.1 5.9 na na