Contents TOC o “1-3” h z u List of Tables PAGEREF _Toc512524716 h 2Market Overview PAGEREF _Toc512524717 h 3Potash Fertiliser Price History PAGEREF _Toc512524718 h 4Price forecast PAGEREF _Toc512524719 h 5The long term outlook for food and agricultural markets PAGEREF _Toc512524720 h 6Risks to the Outlook PAGEREF _Toc512524721 h 6Outlook for long term supply PAGEREF _Toc512524722 h 6Determining a long term trend price for potash PAGEREF _Toc512524723 h 7Escalation of the LRMC PAGEREF _Toc512524724 h 7 List of Tables TOC h z c “Figure” Figure 1Fertiliser Prices Index PAGEREF _Toc512525592 h 3Figure 2U

Contents
TOC o “1-3” h z u List of Tables PAGEREF _Toc512524716 h 2Market Overview PAGEREF _Toc512524717 h 3Potash Fertiliser Price History PAGEREF _Toc512524718 h 4Price forecast PAGEREF _Toc512524719 h 5The long term outlook for food and agricultural markets PAGEREF _Toc512524720 h 6Risks to the Outlook PAGEREF _Toc512524721 h 6Outlook for long term supply PAGEREF _Toc512524722 h 6Determining a long term trend price for potash PAGEREF _Toc512524723 h 7Escalation of the LRMC PAGEREF _Toc512524724 h 7
List of Tables TOC h z c “Figure” Figure 1Fertiliser Prices Index PAGEREF _Toc512525592 h 3Figure 2U.S. Fertiliser Consumption PAGEREF _Toc512525593 h 4Figure 3Potash Price history, US Dollars per Metric Ton PAGEREF _Toc512525594 h 5Figure 4Consumption of potash fertilisers PAGEREF _Toc512525595 h 5Figure 5 Total capital expenditure by nutrient, 2015-2019 (Billion US$) PAGEREF _Toc512525596 h 7Figure 6 The value of fertiliser sales (Billion US$) PAGEREF _Toc512525597 h 7

Market OverviewWith the easing of food prices, energy prices also eased since 2012. The average Brent crude price was US$111.9 per barrel in June 2014, and has been fluctuating around the US$105 per barrel level over the past three years. This period of moderate volatility follows fluctuations in 2012 where the oil price was at a peak price of US$124.9 per barrel in March 2012 and a low of US$95.6 per barrel in June 2012. High energy prices impact various cost segments, including global fertilizer industry.
The World Bank’s Fertilizer Price Index rose marginally in the first quarter (q/q), following an 8 percent gain in 2017 (Figure 1). Although there was moderate demand over the period, the fertilizer markets remain over-supplied, as new capacity continues to come online. Nitrogen (urea) prices dropped 6 percent on weak import demand. This followed strong price gains in fourth quarter due to supply shortages. Other fertilizer prices moved higher in the first quarter. Phosphate DAP and phosphate rock prices rose 13 percent and 6 percent, respectively, on supply outages and higher input costs, while potash prices were unchanged. Fertilizer markets continue to face relatively weak global demand due to low crop prices, while new capacity continues to come online from investments made several years ago when fertilizer prices and farm profitability prospects were higher. (Source: Global Economic Prospects, Commodity Market Outlook, April 2018, World Bank).

Figure 1Fertiliser Prices Index
Source World Bank
In October 2018 prices spiked amid production outages in the Middle East, Algeria, Indonesia and Venezuela, as well as delayed start-ups elsewhere. Prices subsequently pulled back as production was restored and new capacity entered the market. Nevertheless, prices are higher on a year-on-year basis due to rising energy production costs, specifically the price of fossil fuels, especially coal and natural gas. U.S urea imports continue to drop as new domestic capacity displaces imports. Meanwhile production in China—the world’s largest producer—fell for the second straight year due to rising costs and to increasing environmental regulations. This contributed to a halving of its exports in 2017. The global urea market is projected to remain oversupplied due to new capacity from Azerbaijan, Indonesia, Russia and the United States.

Fertilizer prices are forecast to rise by 2 percent in 2018 on relatively firm demand, but markets are anticipated to remain well supplied. Fertilizer application, which has been on a rising trend, remains constrained by relatively weak crop prices, which in turn reflect well-supplied agriculture markets (Figure 2). Fertilizer prices are expected to strengthen moderately over the medium term due to anticipated growth in demand and higher energy costs, and to reach levels that will incentivize new capacity. Downside risks to the forecast include weaker demand, larger increases in new capacity, and restart of idle capacity. Upside risks include higher agriculture prices which help boost fertilizer demand, higher input costs, and stricter environmental policies.

Figure SEQ Figure * ARABIC 2U.S. Fertiliser Consumption
Source Fertilizer Week; Fertiliser International; World Bank
Potash Fertiliser Price HistoryHistorically, the trend of MOP prices has been relatively stable, but there were peaks in the mid-1970s and the early 1980s that corresponded to the two big oil/ commodity price shocks. In general the supply situation has been characterised by a persistent surplus of capacity. In the mid-1980s, the Canadian industry started to deal with its over-capacity situation by electing to cut back production and even mothball some capacity. However, this situation was aggravated at the start of the 1990s when the USSR collapsed, destroying internal demand. Here, the potash industry began to establish new export markets to re-build output, but producers in Russia and Belarus quickly accepted the merits of the Canadian strategy and moved to limit their own production.

Thus for a period of more than 15 years the major potash producers, who together account for two thirds of world supply, followed a strategy that enabled them to avoid serious price erosion in an oversupply situation. The fact that potash prices were depressed, as well as being lower than N and P fertilizer prices, does not appear to have been a significant factor driving the growth of demand in new consuming countries, i.e. farmers were not choosing to buy more potash simply because it was cheap.

Figure 3Potash Price history, US Dollars per Metric Ton
Source Fertiliser International; World Bank
Potash (potassium chloride) prices were unchanged, following a 1 percent gain in the fourth quarter of 2017, despite strong demand in key importing countries—Brazil, China and India. New projects delivered less than anticipated, and supply restraints (including idling and closures) have kept the market relatively tight. However, new capacity is coming online this year, notably in Canada and Russia, and the market is forecast to remain in surplus.

Price forecastIn using the projections for agricultural production as a basis for their K2O fertilizer forecast, they have made two important assumptions:
Fertilizer consumption moves in line with agricultural production. Since the end of the Green Revolution in the late 1970s, there has been extremely high correlation between consumption of mineral fertilizers and agricultural production.

Nutrient ratios change the demand trend of fertiliser. Also, they consider other primary sources of fertilizer K2O and non-fertilizer consumption of potassium chloride in order to generate a forecast of potassium chloride demand.

Figure 4Consumption of potash fertilisers
Source World Bank
The long term outlook for food and agricultural marketsDemand for fertilizers is closely related to food consumption, as well as the need for animal feed, natural fibres and biofuels. Over the long term it becomes more difficult to predict the development of variables, especially the timing or duration of economic cycles driving income changes. Instead, the focus of analysis is on the structural elements that determine trend levels and rates of growth through time. The drivers of fertilizer demand that will persist over the long term will be food consumption (driven by population growth and changes in income) and changes in agriculture productivity.

They believe that the ability of agriculture to meet future demand for food will be principally governed by resource constraints and agricultural productivity and these issues are considered below.

Resource constraints
The most notable resource constraints to future agricultural production are the availability of land and water. Agricultural producers need to increase agricultural land area and/or increase yields, but the availability of arable land may become a limiting factor.

Agricultural Productivity
There has historically been a clear correlation between GDP per capita and crop yields, implying that further, possibly greater, improvements can be expected based on our forecasts for income growth.

Risks to the OutlookRisks and uncertainties, which could result in significantly different scenarios; energy prices or wider policy support, the net macroeconomic effect of climate changes, biotechnology and the introduction of new farming methods and technologies and water constraints.
Key risks to the forecasts are associated with volatility of energy and fertilizer prices (both of which are key inputs, especially to grains and oilseeds) and changes in trade policies. Other risks such as production subsidies and the diversion of some food commodities to biofuels have diminished.

Energy, a key input to most agricultural commodities, affects the costs of production directly through fuel use and indirectly through the use of chemicals and fertilizers. Energy prices are expected to increase almost 20 percent in 2018 and, as noted in the energy section, this forecast is subject to considerable upside risks. Higher-than-expected energy prices could exert upward pressure on agricultural prices. Research reported in the July 2016 edition of the Commodity Markets Outlook suggests that a 10 percent increase in energy prices is associated with a 2 percent increase in grains and edible oil prices.

Outlook for long term supplyThere is no constraint on availability of potash minerals over a future horizon, so they assume that future production will increase according to our demand forecast.

Projected capacity = prior year existing capacity + capacity creep (0.50%) – closures (0.35%) + committed capacity
Determining a long term trend price for potashFor the long-term it is more reliable to focus on the structural elements that determine the underlying trend (LRMC), and the reason for the use of this concept is that the price of a commodity theoretically acts as a signal for investment over the long run.

In order to calculate and forecast the LRMC take account of three main elements: operating costs – long-term operating rate of 80%; capital costs and key variables that affect these costs.

Escalation of the LRMCThe LRMC represents the equilibrium or trend price around which actual cyclically driven prices will fluctuate. The LRMC is not a fixed quantity, but a variable that changes over time, because its components evolve over time.

Figure SEQ Figure * ARABIC 5 Total capital expenditure by nutrient, 2015-2019 (Billion US$)
Source SEQ Source * ARABIC 2 Fertiliser Week; Fertiliser International; World Bank
Figure SEQ Figure * ARABIC 6 The value of fertiliser sales (Billion US$)
Source SEQ Source * ARABIC 3 Fertiliser Week; Fertiliser International; World Bank