Only a month ago, I wrote that conditions were turning favorable for the global potash industry.
But now a massive potash mine accident in the Perm region of Russia will remove a large amount of supply from the marketplace.
The mine in question is the Solikamsk-2, which is owned by the world’s largest producer of potash, Uralkali ADR (URAYY). A giant sinkhole opened at the mine, caused by a huge inflow of brine, threatening 2.3 million metric tons (mt) of potash production capacity. The neighboring Solikamsk-1 mine is also at risk, with 1 million mt of capacity.
This potential loss is significant, accounting for 25% of Uralkali’s output and 5% of the global supply.
This is an unfortunate accident, but it’s serendipitous for the market as it’ll improve the outlook of an industry that’s been suffering steep price declines for over a year, until the recent turnaround.
Positive Potash Players
The good news for Uralkali is that the brine inflow has slowed greatly. However, the fact remains that some potash production capacity has been lost.
In my last article, I told readers that the world’s second-biggest potash producer, Canada’s Potash Corporation of Saskatchewan (POT), was getting more positive on the industry’s outlook.
In November, two other substantial players in the global potash market also said conditions were turning more favorable.
The first company is Germany’s K+S Group ADR (KPLUY). The company recently upped its full-year profit and revenue outlook, citing the recovery in both potash demand and prices.
It now says that potash demand for this year will hit 62 million mt. That figure is higher than Uralkali’s 60-million-mt projection, which in turn was raised only a few months ago from between 56 million and 58 million mt. K+S said demand in South America and Asia were particularly robust.
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Chile’s Sociedad Quimica y Minera de Chile (SQM) also climbed aboard the bandwagon in November. It lifted its potash demand forecast and pointed to “some price recovery.”
The industry as a whole is looking up, but there is one clear winner.
Rising to the Top
Despite the fact that the company was considering backfilling the worked out areas of the mine, the company is speeding up development of other potash mines in the region. This tells me that they’re worried.
The biggest beneficiary of any disruption to Russian potash supplies is clearly Potash Corp., which may once again become the world’s largest potash producer, thanks to the mine accident.
AltaCorp Capital, Inc. analyst John Chu told Bloomberg that POT stands to gain about 1 million mt in sales, at the expense of Uralkali. It can easily meet the increased demand since it’s currently raising its production capacity from the current 12.4 million mt per year.
This will prove especially useful as potash price contracts move higher in 2015, especially the company’s contracts with China.
In 2015, it’ll likely pay $340 per mt for potash, up from $305 per mt in 2014. Other consumers, such as Brazil, may end up paying $400 per mt for a granular form of potash (mainly from Uralkali).
These market dynamics should clearly help Potash’s stock, which is still down about 20% from its 2013 peak. Any weakness on the back of positive talk from Uralkali will offer investors a good entry point.
And “the chase” continues,
P.S. Follow me on twitter @TimMaverickWSD!
Editor’s note: Post updated on 12/5 to address inaccuracies in the original article.