* Potash surplus seen increasing in years ahead
* China's increasing capacity a threat to major producers
By Euan Rocha
TORONTO, Sept 25 A steady expansion of
potash-mining capacity could soon crimp profit margins and test
the market discipline of a small circle of producers that have
long controlled prices for the essential crop nutrient.
Even though global potash exports fell more than 70 percent
in the first half of 2009, major producers have kept a tight
rein on supply, limiting the downward momentum on pricing
triggered by a sharp drop in grain prices.
Potash prices are down from their mid-2008 highs, but they
have held up better than those of nitrogen and phosphate -- the
other two macro nutrients used by farmers worldwide.
But analysts say producers may start to lose their grip as
existing producers expand production and as newcomers and
emerging economies like China play a bigger producing role.
"The more capacity that's out there, regardless of whether
it is in the hands of the same players, (the more) the
likelihood that people may break (ranks), said Morningstar
analyst Ben Johnson.
Buyers have has already started to flex their muscles.
Indian buyers recently pushed debt-laden Russian producer
Silvinit SILV.RTS to cut its price to $460 a tonne from a
year-ago contract price of about $625 per tonne.
The deal forced other suppliers to follow suit and brought
potash spot prices down to about $500 a tonne, well below the
$700 level seen when the Indian contract was signed in July and
sharply off last year's peak of about $1,000 a tonne.
Yet that price drop has not stopped players like Potash
Corp (POT.TO) (POT.N), Mosaic Co (MOS.N) and Uralkali (URKA.MM)
from pushing ahead with multi-billion dollar expansion plans,
as potash pricing still remains at historical highs.
"From 2011 and beyond, the global supply/demand balance
shows a widening potential surplus, accounting for 25 percent
of world supply in 2013," Patrick Heffer and Michel Prud'homme,
of the International Fertilizer Association, said in a recent
That will test the discipline of producers, who currently
run their mines well below capacity rather than cut prices.
"Right now you can operate at 50 percent or so of capacity
and still be marginally profitable and keep things going," said
Morningstar's Johnson. "But when your operation gets
incrementally bigger, and as in the case of Potash Corp, nearly
doubles, that becomes increasingly difficult to do."
Potash Corp, the world's largest producer of the mineral,
began an expansion in 2005 that will roughly double its annual
production capacity to 18 million tonnes by 2012.
The company, which enjoyed gross margins of almost 80
percent on potash in 2008, is this year operating at 30 percent
of capacity. It has cut its 2009 earnings forecast several
times as demand slowed.
The face of the industry could also change if China, the
world's largest potash importer, expands capacity as much as
Fertecon, which provides information on the fertilizer
industry, expects that by 2013 China will have capacity to
produce about 5.3 million tonnes of potassium oxide -- the most
potassium rich form of the mineral.
That could account for more than half of Chinese
consumption and boost competition among existing producers.
"It would increase their (China's) influence on pricing,
because they will need to buy less and they can bargain
harder," said UBS analyst Alexei Morozov.
"In the past, when they needed to get the volumes they had
no choice, but to accept the price. But, if they have more
internal capacity, they (would) have more flexibility and it
would increase their bargaining power."
(Reporting by Euan Rocha; Editing by Frank McGurty and Janet