Current potash environment
PotashCorp’s (POT) CEO (chief executive officer) Jochen Tilk said potash prices for the company were 20% higher year-over-year, driven by higher affordability and tight supply. He added that potash fertilizers continue to remain affordable due to lower prices compared to crop prices.
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Potash consumption drivers
In the above chart, we see the drivers of potash fertilizers. Between 2001 and 2016, the global production of G&O (grain and oilseeds), which is what PotashCorp focuses on, has grown at a CAGR (compound annual growth rate) of 2.3%. Over this period, potash consumption rose at a CAGR of 2.7%.
The growth in F&V (foods and vegetables) production was more closely aligned with potash consumption growth at a CAGR of 2.7%. The other crops, which include pulses, fiber crops, tubes, and roots, have grown 1.6% over the same period.
Looking beyond 2017 in the above chart, growth in these crops is expected to continue, which will eventually drive the consumption of potash fertilizer. PotashCorp projects anywhere between 2.5% and 3% CAGR in potash consumption. That could support potash players (MOO) PotashCorp, Mosaic (MOS), Intrepid Potash (IPI), Uralkali, Belaruskali, and Israel Chemicals (ICL).
Given an expectation of potash consumption growth, we should also see how supply is expected to grow in the coming years, which will eventually set the expectations for prices.
In the above chart, we see potash’s operational capability, which tells us how much potash production can be achieved from existing and expected capacity additions. In the above chart, we see that potash consumption is expected to grow to 70 million tons by 2020 from the current 60 million tons, and the operational capability line is expected to be above those levels.
Potash price outlook
With a higher operational capability compared to consumption, potash prices could remain balanced in the coming years. PotashCorp believes that new production capability will eventually level out with potash demand.