We continue to favor fertilizer space on recovering demand – and the old adage, “you can delay but you can’t deny fertilizer applications.”
Some interesting developments are taking place on the contract side. The Russians today confirmed the India potash contract for April 2014-March 2015 has been set at $322/mt for 800k tonnes.
This price is a little disappointing in absolute terms as we could have seen $340, but it is in-line with market expectations of $320-325/mt. Remember we were at $427/mt last year before the Russians sabotaged the potash market by breaking their sales agreement with Belarus (BPC).
Regarding the India contract: The 800k tonnes of quantity is a marginal positive given the previous India contract was 1mn tonnes with BPC. We are seeing greater demand coming out of Brazil who was the first to book a new contract 6 weeks ago. China should follow.
Unlike other commodities, there is little question about demand dynamics for potash. The world continues to need more. At the end of 2013 the global demand for potash was around 55m tonnes. It is expected to grow 3-4% this year. By 2017 the base case demand profile for global potash is around 65m tonnes.
The breakdown in spot potash pricing last year was out of concern that one of the great cartels in the world was breaking down and production discipline would evaporate after years of the Russians, Belarussians, Canadians, US, and Australia working more or less together.
When Russia broke away, the underlying stocks in the sector were hammered. We argued then that move was overdone and eventual sanity would return to producers – even the Russians. We also argued that the stocks were fantastic 12-15month investments.
Potash (POT, quote) continues to breakout and we are adding to a core position and expect a move to $38.50 before we test resistance. $38.50 is more or less the level POT was at when the price war broke out.
See bottom graph to view base case supply demand production levels for potash into 2017.
Potash Chart – Breaking Out
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