Potash Corp. sees a bottom in the fertilizer market (Part 4 of 7)
Demand fundamentals are supportive
The outlook for crop prices, a key driver that affects farmers’ return and how much farmers are willing to pay, was tempered at the start of 2014. But Potash Corp. (POT) expects fundamentals for fertilizer demand to remain supportive.
North America: Soybean
In North America, farmers are expected to replace soil nutrients after reporting one of the best yields in history. Data from the USDA shows high correlation between nitrogen consumption and the acreage planted for corn. Given how far corn prices have fallen this year, farmers aren’t expected to plant as much. Potash, however, has historically had a much stronger relationship with soybean plantation (note that this doesn’t suggest causation, but it’s a start). As soybean prices haven’t fallen as much as corn, farmers will likely continue to allocate a large acreage of land for soybean.
China: Affordable potash
Demand in China is also expected to improve because of how favorable potash has become (see the graph above). If history is to repeat or rhyme, this affordability should translate to high consumption growth—like from 2000 to 2005, for example. While we don’t know whether potash consumption is more driven by corn or soybean in China, commodity prices strongly correlate since they’re often driven by the same macro fundamentals, such as weather and emerging markets’ economic growth. Plus, they’re generally substitutable.
China: Domestic production
China’s potash consumption had grown at a much lower pace than what the industry expected over the last few years. This tepid growth meant weak demand for imported potash as China’s domestic potash production increased. Production of muriate of potash (potassium chloride) grew from ~3.9 million tonnes to ~4.8 million tonnes. Primary SOP (sulfate of potash) also doubled over the same period. Despite this increase, China’s future domestic production growth is relatively limited. “We think that domestic production is just about tapped down in terms of its ability to grow, and our own contacts there in China say that, long-term, China is going to be 75% dependent on imports,” said the Potash Corp. CEO.
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