The Slow Route to Increased Potash Prices

While no one has a crystal ball, it is our opinion that potash prices will likely rise, but at a slow rate. It is no secret that the potash market is largely controlled by an oligopoly. This being said however, it is not a perfect oligopoly, there is “leakage” of approximately one-third due to producers outside of the oligopoly. These producers enjoy some of the benefits of the oligopoly, but to a degree function outside of this structure. Additionally there is a natural reluctance to higher prices within an oligopoly. The kinked demand curve of the oligopoly helps describe this reluctance of the upward rise in prices.
The kinked demand curve shows that there is an elastic demand at higher prices, yet an inelastic demand curve at lower prices. This curve is shown in figure 1.

 

Kinked Demand Curve

Figure 1 Kinked Oligopoly Demand Curve

This curve indicates that there is a reluctance to raise prices as others can then step in and sell tonnage at the lower price, but little is gained by lowering prices due to the inelasticity of the demand curve. This is further exacerbated by those producers that operate outside of the cartels. If those in the oligopoly “agree” to raise prices, there is roughly a third of the production that producers must then make a decision whether to raise prices or to expand their market share by holding prices at the lower level. This decision is a bit of a balancing act for these producers at least to the point where they have consumed (sold) all of their production. Some will likely decide to raise prices while others may not decide to do so. A portion of this decision would likely involve where they are in terms of capacity, overall costs, and in terms of marginal costs.

Furthering this example, below is a simplified model that compares the current capacity, future capacity, and effective capacities, of those in the oligopoly, and those outside of the cartels. A snapshot of this model is shown in figure 2. This model makes some simplified assumptions on expansions, effective capacities, and market growth, but shows that in “early” years, there would not be as much ability to raise prices, as there would be in later years. This model is simplified, and certainly all losses to producers is not going to occur to oligopoly members, but will be distributed likely across all producers depending upon the structure of their costs of production. Additionally as the producers approach effective capacity (whatever that may actually be) the likelihood of expansions and greenfield projects increases, which would again put the model in flux, as well as the ability to alter the price of potash. This also does not address pricing issues such as increased agricultural commodity prices, loss of capacity due to facility issues (flooding, strike, etc.), or capacity issues as a result of things such as world turmoil (Russia, Ukraine, etc.). It should also be remembered, that North American portion of the oligopoly only applies to tonnage sold outside of North America, in North America there is a more “normal” supply and demand curve. This of course only applies to the point at which an arbitrage opportunity exists for those in the rest of the world to exploit.

Simplified Model

 

Figure 2 Simplified Model of Potash Production and Market by Member Type

If you would like to discuss this, or any mining or management opportunities, please contact Schlumpberger Inc.

Highfield Resources Completes PFS

Highfield released a PFS for their Javier Potash Project in Spain. The study indicates that this relatively shallow deposit will be accessed via decline and have a CapEx cost of $307.9MM (USD). Operating costs are expected to be $162.5 per tonne for the expected production of 860K tonnes per year.

Contact Schlumpberger Inc to discuss this or any other potash or mining projects.LHD

Indian Elections Complete, What is the Future for Potash Sales?

With the completion of the elections in India, hopefully some of the uncertainty has been removed from the Indian economy. In recent years the emphasis has been on nitrogen based fertilizers in India by virtue of a shrinking potash subsidy. This among other things has resulted in a decrease in total potash consumption from a high of about six million tonnes to approximately 3.5 million tonnes. This reduction has resulted in an unbalanced application of fertilizer which will ultimately result in a reduction in agricultural yield.

As this is an important market regarding potash sales, it will be interesting to see how quickly, and if Mr. Modi will be able to reform the subsidy program and/or institute new policies to balance fertilization and ultimately boost agricultural yield while not putting the country in fiscal peril.

Contact Schlumpberger Inc to discuss the potash markets.

How To Make Money in Potash?

With earnings now in from many of the potash producers what are we seeing in the potash markets?
After last year’s breakup of BPC we all know that potash prices are down from last year but sales are strong. The North American producers saw strong domestic markets, but export sales were negatively affected by the ability to get product to port, due to logistic issues. Agrium reported that domestic sales increased by 47 percent, PotashCorp indicated that domestic sales increased by 24 percent, and Mosaic showed a 20 percent increase in total sales, presumably most of this due to North America. Additionally Intrepid Potash showed a 30 percent increase from this time last year. Offshore producers Uralkali, and Belaruskali are also indicating that sales are improving from this time last year. Uralkali has reported a five percent increase, and Belaruskali has reported March sales of over 1MM tonnes, the “highest figure on record”. Projections for world consumption vary, but total demand is projected to be in range of 57 million tonnes for 2014. One of the major producers is even indicating the demand for potash to be in sixty million tonne range for 2015.
Prices in the North American and other parts of the world are also showing signs of improvement. Historically there has been a correlation between the cost of food and agricultural products and the price of crop nutrients. With food prices up for 2014, this trend is likely to continue.
If you would like to discuss the crop nutrient markets or a specific project, please contact Schlumpberger Inc

Planting Season and Potash Sales

Planting season is upon us at least for the northern hemisphere.  This is a busy time of the year for many, including potash producers.  Many of the potash companies have shared their quarterly sales results.  What are we seeing?

Uralkali in April indicated that sales are up five percent.

PotashCorp announced in April that while overall sales are up slightly, North American sales surged by 24 percent.

Mosaic shared in February that their sales were down slightly from 1.8 million tonnes, to 1.7 million tonnes.

Finally Intrepid Potash’s April announcement indicated that potash sales had increased by over 30 percent to 242,000.

Is this just price elasticity?  Or are there other factors at work?

Contact Schlumpberger Inc to discuss the potash markets.4 rotor