Excess capacity will keep phosphate prices stable

Phosphate prices are likely to stay where they are as one major supplier of the product reduces exports at a time when two others are increasing world supplies.

James O’Rourke, president of Mosaic Co., the world’s largest producer of the product, recently told investment analysts to expect reduced sales from China this year.

“With economic and environmental pressures mounting on Chinese producers, we expect their exports to fall to somewhere around eight million tonnes,” he said in a conference call.

That would be down from 9.5 million tonnes last year and 11.6 million tonnes in 2015.

“The markets are giving us some momentum,” said O’Rourke.

David Asbridge, analyst with NPK Fertilizer Advisory Service, agreed that China will likely reduce exports because of shrinking margins in a country that relies on underground rather than surface mining.

“It costs more for them to dig it out and bring it up. It’s like potash mining in Canada,” he said.

However, he said the reduction in Chinese exports will be offset by increased production in Morocco and Saudi Arabia, where new projects are expected to come on line this year.

“I don’t see any growth in prices for phosphate because there is excess phosphate capacity out there already,” said Asbridge.

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Phosphate is the second most popular fertilizer used on Canadian farms, according to Agriculture Canada. It accounted for 21.3 percent of total fertilizer use in 2015 behind urea at 35.6 percent.

Michael Rahm, vice-president of market and strategic analysis with Mosaic, thinks the phosphate market will remain well balanced for the next five years.

He told analysts there will be an extra two million tonnes of capacity in Morocco plus another three million tonnes from Mosaic’s joint venture in Saudi Arabia with the Saudi Arabian Mining Co. and Saudi Basic Industries Corp. In addition, he expects more production from places such as Tunisia.

Rahm is assuming phosphate demand will grow by 2.1 percent per year over that five-year period, expanding to 73 million tonnes in 2021 from 66.4 million tonnes in 2016. That’s an additional 6.6 million tonnes of demand.

“It looks like a well-balanced situation over the next five years,” he said.

“That’s not to say that over the next year or so, when some of this new capacity comes on, there may not be some pain or disruptions caused by a big surge of capacity.”

Richard Mack, Mosaic’s chief financial officer, downplayed the potential of the new plants causing prices to drop.

“It’s not like you turn a key and all of a sudden you’re producing three million tonnes of product on an annual basis,” he said.

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The Saudi Arabia project will start producing phosphate during the second half of this year.

“We probably estimate anywhere from 300,000 to 500,000 tonnes of production this year, and then that project will be ramping up for the vast majority of 2018,” said Mack.

Asbridge agreed with Mack’s contention that the new capacity will not disrupt the market, but with one important caveat.

“As long as the Chinese don’t try and crank back up again, then it should not be too much of an impact on the phosphate market,” he said.

Rahm said Mosaic has done a lot of analysis on the China situation and believes it will continue exporting seven to eight million tonnes per year over the next five years, which would keep supply and demand in balance.

There are already rumblings about additional capacity being built in Morocco and Saudi Arabia beyond the next five years.

“And frankly, after 2021, there will be the need for additional capacity coming from somewhere if you expect phosphate demand to continue to grow at a couple of percent per year,” he said.

Asbridge said that is not an unreasonable expectation because Brazil is bringing more land into production and is growing more second crop corn, and China is attempting to grow more fruit and vegetables, which are big users of phosphate.

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“I don’t really see any big jumps in prices, but it should be a fairly stable to slightly increasing market over the next five years,” he said.