Via Potash Works
I first wrote this article during the first week of February and submitted it the following week. Then Vladimir Putin decided to invade the Ukraine, and with this act of wanton aggression, the world changed. So did my article…
Putin’s invasion of the democratic nation of Ukraine threatens Ukraine’s existence as a sovereign state, and has prompted America, the EU, and allied democracies to come forward as guarantors of Ukraine’s freedom.
The Russian leader has taken no steps to end the conflict; in fact, the level of violence has grown – witness the demolition of Ukrainian cities of Mariupol and Kharkov. Even if he does accept some form of rapprochement with Ukraine, it is unlikely that he will give up his long-term aim of obtaining hegemony over former Soviet vassal states. The borderlands between Russia and western Europe and the Baltic states will remain a flashpoint for years to come.
The war threatens the security of flows of materials both from, and into, Russia for three reasons. First, America and its allies have imposed trade and currency sanctions against Russia and its ally Belarus (which was under American sanctions prior to the invasion). Second, Russia has blocked the export of certain materials out of Russia. Third, there is the danger posed to shipping by open hostilities.
These impediments will have grave impacts upon several global agricultural commodities, one key material being potash.
Potash markets and pricing in the 21st century
Long-term world demand for potash has grown at an average annual rate of between 2.5 per cent and 3.0 per cent since 2000, driven mainly by the need for increased food production in Asia, Africa, and Latin America. Historically the demand and growth of potash has followed the expansion in the production of grains, oilseeds, fruits, and vegetables with increases in food demand driven by population growth, declining soil fertility, and climate change. It is expected that worldwide demand will grow from 69 million in 2020 to 73 million tonnes by 2023.
Global supply comes from two main sources: Canada, being the largest producer at some 22 million tonnes (KCl), or 31.8 per cent of the total, and Russia and Belarus, with combined production of some 26 million tonnes (KCl), or 37.6 per cent. It is important to note that when the term “Canada” is used, I mean Saskatchewan as 100 per cent of Canada’s production comes from Saskatchewan.
In terms of exports, Canada (i.e., Saskatchewan) is the largest exporter at some 22 million tonnes (KCl) or 39 per cent of the total, with Russia and Belarus collectively exporting some 22.5 million tonnes (KCl) or 40 per cent of the total.
For the worst-case scenario of complete blockage of Russian and Belurussian potash exports, an immediate market shortfall of at least the equivalent of Saskatchewan’s current potash exports will be created.
What will be the impact upon potash pricing?
Prices in recent years have tested floor levels that created cash negative flows for higher-cost producers. For instance, in 2020, potash prices were 30 per cent lower than the 10-year average dropping to $230USD per tonne Granular MOP US Corn Belt. However, this reversed in 2021, with prices reaching $710 USD per tonne Granular MOP US Corn Belt as of February 4, 2022. I’ve seen early March price quotes up to $900USD.
Here what is important to note: prices began to rise during 2021, well before there was any suggestion of global supply impediments. What will happen to prices if there is a sudden global supply decrease (or redirection) of 40 per cent of the global potash trade?
Let’s look at the U.S. According to the USGS, American final 2021 imports of K2O for consumption in all forms of potash (MOP, nitrate, sulfate, and potassium magnesium sulfate) were 6.475 million metric tons with 74 per cent of total imports from Canada, 11 per cent (712,250 tons) from Russia, and seven per cent (453,250 tons) from Belarus. A shortfall of 1,165,500 tons can probably be made up from expansion of existing Saskatchewan production, but what of the balance of curtailed Russian and Belurussian potash exports? One scenario is that China absorbs Russian and Belurussian production, leaving other potash importers (like India) short. Canadian potash thus displaced from China markets will undoubtedly make its way to these other markets to fill the gap.
Let’s look at Brazil. Brazilian President Jair Bolsonaro was quoted by CNN on February 27 saying that Brazil would “adopt a neutral stance on Ukraine” and pointed out that Brazil is dependent on Russian fertilizer, and that action against Moscow “could bring serious harm to agriculture in Brazil”. He added that he was in support of peace — “but we don’t want to bring more problems to Brazil”. According to the World Bank, in 2019 Brazil’s total imports of “potassic fertilizers” was 10.5 million tonnes with Canada (Saskatchewan) supplying 3.5 million tonnes and the Russian Federation and Belarus supplying 4.8 million tonnes. President Bolsonario has reversed himself since then, and Brazil has begun to look to other suppliers. If we assume “potassic” means K2O, this is some 7.6 million tonnes KCl – two new Saskatchewan mines.
Saskatchewan mines are some of the lowest-cost producers in the world and there is shuttered production capacity that can be restarted – in fact, Nutrien announced recently that it was doing just that. Nevertheless, the loss of potash from Russia and Belarus requires the present Saskatchewan industry to double production. Production capacity will grow with the addition of new developments, such as BHP’s Jansen mine, but this is at least five years into the future, which will do little to ease near-term supply shortages.
Quo Vadis Potash?
It troubles me greatly to consider the above turmoil as an opportunity. What is happening is first a great humanitarian tragedy. Nevertheless, a person in the potash business must look at the facts and draw his or her own conclusions – here are my five take-aways:
- Even with a cessation of hostilities between Russia and Ukraine, I doubt this will be the end of the story as Vladimir Putin has shown no sign that his intentions may change, so the risk of significant alteration of the potash supply-demand dynamic will continue.
- Saskatchewan, with its vast reserve of potash, can easily supply any long-term shortfall caused by the shuttering of Russian and Belarussian production.
- What will not be easy to do is ramp up existing production to a level that can replace existing Russian and Belarussian potash.
- “Small mine” proponents and projects already at the construction decision stage may be able to contribute to filling the supply gap in the next few years as these projects will require less capital investment and are also at advanced stages of development.
- The last potash “boom” from 2005 to 2013 resulted in a worldwide resurgence of potash exploration. While some new deposits were found, none come close to matching Saskatchewan’s immense potash reserves, so the province has the opportunity to become the undisputed global leader in providing a free-market supply of this vital nutrient.