Potash miners holding off major expansions despite market turmoil

Potash giants outside Russia and Belarus have yet to rush out major mine expansions to fill near-term supply gaps, even after months of sanctions and war have upended fertilizer markets.

The decision to expand operations might seem like an obvious choice given Belarus and Russia, which together account for about 37% of the global potash market, now face difficulties in selling and shipping bulk fertilizers. The potash market was shaken even before Russia's invasion of Ukraine in late February. Lithuania banned Belarus from using the Port of Klaipeda, through which it shipped the majority of its potash, from Feb. 1. The ban forced Belarus to divert exports to Russia, a key ally and trading partner, but after the invasion, Russia had little extra bandwidth to handle new supply at its ports, according to analysts.

Despite expectations for potash supply to fall by 10% or more in 2022 in a roughly 70 million tonne-per-year industry, potash miners such as Canada-headquartered Nutrien Ltd. are likely to remain cautious about committing to major expansions, analysts said. Looming over any decisions are worries about spending too much on new output that could end up being redundant and supplying a market beset by high prices that could kill demand.

"Why would they go and do that today, when nobody knows how Russia is going to play out and nobody knows how Belarus is going to play out," said Scotiabank fertilizer analyst Ben Isaacson. "And so to react that quickly, right now, would be imprudent."

Nutrien at a crossroads

Nutrien stands as one of the only major producers that could quickly supply significant amounts of new potash to the market. The company increased annual output to about 15 million tonnes from 14 Mt this year, but held back on more permanent expansions that would require new investments in operations. Management has said that Nutrien is testing assumptions for expanding capacity to 18 Mt with incremental spending, and beyond with heftier capital expenditure.

"Increasing production on a sustained basis requires opening up new ground, installing additional equipment and infrastructure, hiring more people and securing outbound logistics," Nutrien Interim President and CEO Ken Seitz said on a May 3 earnings call. "These are decisions that require careful planning, as they have long-term impacts on our operations and our people."

Analysts said companies such as Nutrien worry that Belarusian production may start to reach markets later this year. As Russia expands shipping capacity in its city of St. Petersburg, it may be able to handle the extra load of Belarus' potash alongside its own bulk products.

"Our expectation is that some time — and it's not precise, but roughly in [the third or fourth quarter] — we should start to see Belarusian potash at least having the optionality to go through St. Petersburg," Scotiabank's Isaacson said.

Russia still finding buyers

Meanwhile, Russian potash appears to be finding buyers, notably in Brazil, a major potash importer. "So far Brazil has managed to secure reasonably normal volumes from Russia, up until now," said CRU Group fertilizer analyst Humphrey Knight.

Unless Russia's potash production is directly sanctioned, such exports are likely to continue, analysts said. That has been true for other metals and minerals, where talk of self-sanctioning has not led to Russia being completely cut off from key markets.

"My view is that fertilizers are going to end up being a little bit similar to energy in Russia; meaning that nobody wants to buy it, but we kind of need to," said Isaacson, who estimated that Russia would likely continue to meet about 50% to 75% of its typical exports this year.

The market's willingness to buy Russian potash, and Russia's ability to get it to market, will also play a roll in Nutrien's decision-making over the scale of potential expansions, analysts said.

"It doesn't make their life any easier in terms of deciding what to do with their idled facilities," Knight said. "While they are continuing to consider re-openings, there's not a great deal of clarity in the current supply situation that would necessarily direct them to one course of action or the other."

A spokesperson for Nutrien declined a request for comment, saying the question of supply expansion will be addressed at the company's June 9 investor day event.

Demand destruction

Miners must also consider the potential for demand destruction in 2022 due to high potash prices.

So far miners have said they do not expect potash prices to lower fertilizer use largely because crop prices are also high. According to this view, farmers are loathe to risk yields as they look to profit from high prices for things such as corn and soybeans.

"Consumption will be forced to adjust to available supply," Mosaic Co. President and CEO Joc O'Rourke said on a May 3 earnings call.

Still, potash use is somewhat elastic as its concentration in soils can sometimes remain high enough for farmers to skip an application without reducing yields. This is particularly true in finer textured soils and in cases where farmers applied higher rates of potash in previous seasons, said Michael Staton, a field crop educator at the Allegan County Extension Office at Michigan State University.

Staton likened a soil's retention of potash to a kind of "bank." So long as farmers make sure potash levels do not dip below critical levels, it allows them to make withdrawals in years when potash prices are high. And with potash prices high in 2022, it would be a good time for some farmers to lean on their soil's potash richness, Staton noted.

"Hopefully, prices drop before next year and we can go back to building up potash as we need to," Staton said.

Potash prices were much lower in recent years, allowing high application rates, which may increase the incentive for farmers to hold off buying as much potash and lower the urgency for ex-Russia and Belarus potash producers to fill the supply gap.

"After two or three years to build up this inventory in your soil, you can skip class and there's no impacting yields," Isaacson said, who noted Scotiabank is "very bullish" over potash in the longer term, but not in the shorter term.

"We are not at all bullish today," Isaacson said. "Prices are out of control. And when Northern Hemisphere demand starts to wind down, basically we think prices will have to correct. And so we're not still backing up the truck trying to buy potash-levered equities right now. We're going to wait for things to calm down."

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