* Potash surplus seen increasing in years ahead
* China’s increasing capacity a threat to major producers
By Euan Rocha
TORONTO, Sept 25 (Reuters) - 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 report.
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 some expect.
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 Guttsman)