UBS cuts potash price outlook, citing credit fears 15th December 2011, by Agrimoney.com
UBS slashed forecasts for potash prices, warning over current "trade nervousness" and, longer-term, setbacks from production capacity hikes and the potential return of corn below $5 a bushel.
Concerns over a repeat of 2008-09, when potash prices plunged during the world economic downturn, have "stalled" potash demand, as large wholesalers "exercise caution" over purchases.
"Fertiliser bulk buyers have become increasingly more cautious of pre-buying and holding large inventories over fears of a 'credit crunch'," UBS said, citing industry sources estimating the demand drop at 15-20%, year on year. "Memories go back to 2008 where prices collapsed after trade finance dried up."
Uralkali, the world's top potash group by production, last week acknowledged that fears over tight credit were, in Europe, hurting demand, while Germany's K+S and Canadian giant PotashCorp have lowered sales guidance.
Indeed, PotashCorp - the world's top potash group by capacity, which last week temporarily closed two mines because of soft demand - overnight revealed that inventories of the nutrient held by North American producers jumped by 400,000 tonnes last month to exceed average levels for only the second time this year.
Crop prices to dip The "purchasing sluggishness" will feed over into lower prices than had been previously hoped in 2012, UBS said, cutting by $40 a tonne to $460 a tonne its expectation for average values during the year, signalling prices in line with 2011's.
UBS potash price forecasts, and (change on previous)
2011: $458 a tonne, -$7 a tonne
2012: $460 a tonne, -$40 a tonne
2013: $450 a tonne, -$70 a tonne
2014: $430 a tonne, -$90 a tonne
2015: $420 a tonne, -$130 a tonne
2020: $500 a tonne, -$50 a tonne
And the bank ditched expectations of price rises further ahead, as lower crop prices prompt farmers to curb spending.
"In the medium term, crop prices look like they will ease from current peaks" as stocks rebuild, UBS said, forecasting the return of Chicago corn below $5 a bushel by 2015.
Further ahead, the extra potash capacity growth highlighted by announcements from K+S, Uralkali and Canada's Agrium will ensure prices return to about $420 a tonne further ahead - $130 a tonne less than previously forecast.
Growth in potash supply averaging 4.1% a year between 2011-20 will exceed that in demand, foreseen rising by 3.4% a year.
'Breaking the cartels' And prices may fall even further longer term – to $300 a tonne - with the entrance into the market of BHP Billiton, which has expressed a preference for free-market sales rather than marketing through the cartels as North America and Black Sea producers do.
Additions to world potash capacity, according to Fertecon, UBS
2011: 1,437 tonnes
2012: 3,287 tonnes
2013:1,948 tonnes
2014: 3,688 tonnes
2015: 3,174 tonnes
The production cuts needed to support prices in the face of overcapacity "will continue to be seen by new entrants such as BHP as unnecessary and costly", UBS said. "We believe that once BHP is trading in the market they see long-term value in breaking the cartels," meaning the potash "may trade at the $300-a-tonne level for some time as a result". The comments come two weeks after members of both the Black Sea's Belarusian Potash Company and North America's Canpotex cartels signalled they will not follow phosphate peers in offering sweeter terms on exports to India, after the collapse in the rupee heightened the cost of purchases.
* UBS kept "buy" ratings on shares in fertilizer groups Israel Chemicals and K+S despite the cut to the potash price outlook.
However, the target price for Israel Chemicals shares was lowered by 6 shekels to 54 shekels, and for K+S shares by E8 to E39.
