Most analysts viewed the breakup of the cartel as negative on potash price.
It seem approved right. Potash price was down from $400 to current $287.
ELM announced economic evaluation in 2011 for Sintoukola Project,
Capex: $2.b?
NPV@12%, $0.99b
The number looks not good even at potash price of $400.
I recalled the potash price used in base case was around $400.
here extracted from the company announced in 2011:
Potash miners face over-supply threat of their own making
Reuters | September 3, 2014 12:59 PM ET
Andrey Rudakov/BloombergNorth American potash producers flexed their market muscle by idling production to boost prices when demand slumped
A pickup in fertilizer demand has brightened the outlook for North American potash companies who suffered through plunging prices and profits after a European trading consortium collapsed in 2013. But any celebration among investors may be premature.
A surplus of potash mining capacity is set to grow even larger in coming years, weighing down the global industry while favoring low-cost eastern European producers over North American miners, who are sticking to a marketing strategy that risks falling behind the times.
And the times are changing. Belarusian Potash Company (BPC), the counterpart to North America’s potash trading consortium Canpotex Ltd, collapsed a year ago, with one partner looking to increase volumes rather than limit output and hope for higher prices.
The first new mines in Western Canada in four decades are also under construction and would be fierce rivals to Canpotex partners Potash Corp of Saskatchewan, Mosaic Co and Agrium Inc.
This year, global capacity will hit 82 million tonnes, but demand will fall well short, even at a record-high level of 57 million tonnes, according to London-based commodity research firm CRU. That gap is set to widen slightly by 2020, when capacity looks to reach 99 million tonnes, far more than is needed to meet demand of only 73 million.
CRU’s demand forecast is based on an assumption that demand will grow faster than it has in the last seven years. If it does not, the supply-demand gulf will grow even wider.
“I’m more worried still about the industry,” said Philippe Capelle, vice-president of equities for Standard Life Investments, which holds shares in Potash Corp and Agrium and likes the companies.
“You’ve had a bounce-back in volumes this year in potash. Do you get a bounce-back next year? Maybe not and then what happens? You still have plenty of supply, so why would the pricing go up?”
Potash Corp shares have risen 28 percent since late July 2013 through Tuesday to trade back around their level before BPC’s collapse that month. But the Toronto-listed stock’s price around C$38 is less than half its record-high value reached during the 2008 commodities boom.
Canpotex is sold out of potash for the current third quarter. But much of that recovery is due to pent-up demand caused by North American railway problems that temporarily stifled the flow of potash.
“You can only restock the cupboard once,” cautioned Scotiabank analyst Ben Isaacson, in a July 24 note.
Potash was an investor darling six years ago on the logic that global population and income growth would drive up grain production.
One by one, producers expanded, starting with Potash Corp more than a decade ago. But fertilizer prices collapsed during the financial crisis, along with other commodities.
Through the ups and downs, North American potash producers flexed their market muscle by idling production to boost prices when demand slumped. But some say changing times calls for a new approach.
“The potash industry needs to take a more pragmatic (approach) to price versus volume, otherwise demand will continue to stagnate and the capacity surplus will be unsustainable,” said CRU analyst Paul Burnside. “It needs to price potash to move, without getting into a price war.”
New Potash Corp Chief Executive Officer Jochen Tilk says he plans no “radical changes” in strategy.
By contrast, after quitting BPC, Russia’s Uralkali OAO focused on driving up volumes. It says it pushed its market share to 23 percent in 2013 from 17 percent in the first half of that year, mostly at the expense of Canpotex, which still holds a larger share of the market.
“Is price over volume the right strategy if you lose market share? I don’t have the answer,” said Standard Life’s Capelle. “You’re not in an oligopolistic environment anymore.”
But Mosaic CEO Jim Prokopanko said shareholders are best served by the traditional Canpotex model. Like Potash Corp, Mosaic has shut in capacity.
“We’re not going to try to sell more product than what the world requires,” he said.
If Germany’s K+S AG and Anglo-Australian miner BHP Billiton complete their Canadian mines, the new North American players will also have to weigh supply and demand, Prokopanko said.
“I think they’re going to be good business stewards, look after their investors’ capital and they’re not going to be crazy about this,” he said.
Yet low-cost Russian producers are less worried about adding supply to the market. One of the reasons Russia’s EuroChem is confident about building two mines by 2017 is that it expects Potash Corp to limit its production if prices dip too low.
“This is one of the considerations, yes – that big incumbent players including (Potash Corp) are likely to pursue price over volume,” said Andrey Ilyin, EuroChem’s finance director, in an email.
Some shareholders are confident in the existing strategy. Favoring price over volume helps preserve Potash Corp’s margins, said Mohsin Bashir, portfolio manager at Stone Asset Management.
But it may be hard for Potash Corp to drive a higher price without a clear competitive advantage, he added.
Ultimately, any marketing strategy must consider what farmers are willing to pay for potash, said Gene Gauss, vice-president of fertilizer and nutrition at Wilbur-Ellis, a U.S. retailer that buys potash from the miners.
He thinks Potash Corp may eventually be forced to pursue a closer balance between volume and price as competition increases.
“I think they’ll have to … It’s just, in this industry now, it’s hard to determine anything in the future based on the past.”
© Thomson Reuters 2014
http://business.financialpost.com/2...-face-over-supply-threat-of-their-own-making/
