In the report authored by Rabobank’s global Food & Agribusiness Research and Advisory, the bank says that the near-term potash market has turned in favor of buyers, giving importers the opportunity to negotiate substantial price discounts for 2013 contracts. However, the current weakness in the global potash market should not divert importers from their focus on securing long-term access to reasonably priced potash. Recent headlines pointing to the softness in potash prices and growing concerns for financing greenfield projects have resulted in bigger challenges for capacity developments, making it even more important for importers to build a balanced ‘potash supply mix’ before prices rise again.
Rakhi Sehrawat, Rabobank food and agribusiness analyst and author of the report, commented, “Until recently, the potash market was mired in acute demand uncertainty and piling inventory levels across key consumption regions. The near-term outlook for the potash market has shifted to favor buyers, enabling importers such as India, China and Brazil to negotiate heavy discounts on short-term prices. Despite this change, we urge importers not to be distracted by the current weakness in prices and to maintain focus on their long-term objective of securing access to reasonably priced potash.”
The bearish market sentiment has raised a fresh set of doubts on the future prospects of new capacity developments. The slowdown in activity by new players in the market, especially the potash juniors, will eventually turn in favor of the current oligopolistic supply structure, supporting the strong price discipline. Importing countries with potash-deficient soils, such as India and China, will require increased potash application in order to ensure their long-term food security. Leaving capacity expansion exclusively to existing players will inevitably strengthen the potash market fundamentals in favor of the suppliers, as demand for potash continues to grow steadily.
Despite the ongoing softness in demand, the supply side is still able to maintain strong margins. Rabobank advises that in order to increase their “walk away” factor in future negotiations, and to put a cap on potash prices, importers need to build a more balanced potash supply mix. This will require building alternatives in the form of equity investment in junior greenfield mines, long-term contract agreements with existing miners, or the acquisition of an existing major potash player.
"It has become extremely challenging for new players in the industry to finance further progress in their respective projects, making it clear that without proactive action by the major importers, the industry structure is guaranteed to remain intact, turning in favor of consolidated suppliers once demand picks up. It is therefore imperative for importers to take steps now to ensure more market-driven pricing that has a stronger alignment with the cost of production," said Sehrawat.
Rabobank says that potash importers need to play tactically to benefit from current bearish market sentiment without losing focus on the long-term strategy. The balance between pushing for price discounts in the short-term and strategic investments to improve future supply mix is crucial. A suitable equilibrium between supply and demand could prove to be a win-win outcome for both sides of the potash market.