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S&P downgrades 3 potash miners on price cut fears, supply glut and heavy CapEx

Standard & Poor's Ratings Services said April 12 that itcut the credit ratings of three major fertilizer companies, citing projections ofa 20% to 30% fall in nitrogen fertilizer prices from 2016 to 2018, and significantupcoming spending by the companies on new projects that could send the companies'free cash flow into negative territory.

The credit agency lowered the ratings of EuroChem Group AG, Germany'sK+S AG, as well as Canadian-basedPotash Corp. of Saskatchewan Inc.S&P also placed the ratings of a fourth company, Russian potash miner , on "negative"outlook, suggesting its ratings could be cut in the near future.

According to analyst Andrey Nikolaev, the primary author of theS&P report, the downgrades reflected the view that "fertilizer prices willremain well below 2015 levels in the next several years."

The potash benchmark price cost and freight China could fallby about 15% to 20% this year and remain at that level in 2017 to 2018, while theprice for phosphate-based fertilizer could decline by 10% to 15%.

These expected price drops, he said, reflected underlying weaknessin the market, including recent falls in crop prices worldwide, which could sapfarmers' ability or desire to buy fertilizer.

New fertilizer supply capacity expected to come into operationin coming years may upset the market balance as well, the report read.

Other factors were the lack of credit facilities available tofarmers in Brazil, a major agricultural market, as well as the fall in the valueof Brazil's currency, the real, which drove up fertilizer prices in local terms.

The potash market, where companies are currently negotiatingwith Chinese buyers to set prices for the coming year, is particularly vulnerable,according to Nikolaev.

But a glut of new potash projects coming into operation in thecoming years was the biggest threat, he said.

"The key risk for the potash market is the greenfield andbrownfield capacities coming on stream."

These included K+S' Legacy project in Saskatchewan, and Eurochem's two Russia-basedprojects — Gremyachinskoeand Verkhnekamskoe.

Other potential potash projects include BHP Billiton Group's massive Jansen mine also in Saskatchewan, where executivesconfirmed earlier this year shafts were about 50% complete, and Uralkali's Solikamsk-3 mine.

State-owned JSCBelaruskali is also planning to expand capacity at its mine, while Slavkali,a company controlled by Ingush-Russian businessman Mikhail Gutseriev, may another potash mine in Belarus.

S&P lowered its ratings on Eurochem to BB- from BB, on K+Sto BBB-/A-3 from BBB/A-2, and on Potash Corp. to BBB+ from A-. It maintained itsrating of Uralkali at BB-, but revised its outlook to negative.

S&P Ratings and SNLMetals & Mining are owned by McGraw Hill Financial Inc.