Sterling Group Ventures Inc. (fka SGGV)

[Refill]

The gist of the Mosaic 8-k is that the phosphate price decline is now over and distributors have begun battling for marketing position;
“In the case of phosphate, the combination of continued strong end-user demand, a lean distribution pipeline and the cumulative impact of several small planned and unplanned production outages has tightened the global market and changed sentiment overnight. As a result, phosphate prices are staging a powerful and earlier-than-expected rally during what typically is a seasonally slow period.”
Phosphate: How Does This Knife Fight End?
The price of DAP loaded on a vessel at Tampa had surged to $475 per tonne during the last week of January, a 40% or $135 gain since the end of November. Tampa SWAP contracts for February, March and April were bid at $455 to $465 per tonne with offers at $465 to $470 at the end of January, indicating that prices likely would trade at these higher levels into the spring application season. The price of DAP loaded on a barge at New Orleans (NOLA) also had spiked to about $440 per ton, a 38% or $120 increase during the same period. NOLA SWAP contracts for February, March and April were bid at $430 per ton with offers just a few dollars higher.
Several factors typically combine to move markets by this much in such a short time. In this case, the combination of continued positive demand prospects, a lean distribution pipeline, the cumulative impact of several small planned and unplanned production outages, a spike in sulphur costs, and an increasing number of logistical problems has tightened the market and quickly changed sentiment. Many analysts point to the significant drop in phosphate prices following the fall application season, the sale of three U.S. panamax vessels to Chinese buyers and hints of several production outages as the events that changed expectations and triggered the early buying onslaught.
Despite somewhat less robust drivers, demand prospects continue to look positive. Global shipments of the leading phosphate products are forecast to climb to a record 64 to 66 million tonnes in 2014, up from our estimate of slightly more than 63 million in 2013. We also project that import demand for these products will rebound to a record 24 to 25 million tonnes this year, up from 22.5 million in 2013.
The demand outlook in the Americas remains outstanding. In Brazil, shipments continue to set new records. We estimate that total plant nutrient shipments increased to 31.3 million tonnes last year, up 6% from 2012. Shipments are projected to increase another 3% to more than 32 million tonnes in 2014. Imports of the leading phosphate products including MicroEssentials ® jumped to nearly 5.1 million tonnes in 2013, an increase of 36% or 1.4 million from 2012 and more than double the volume just five years ago. Imports are projected to stay at this lofty level in 2014. Both total shipments and phosphate imports mirror the increase in soybean production. Based on the latest CONAB estimates, Brazilian farmers are expected to harvest a record 90.3 million tonnes of soybeans this year, up 10% from the record last year and up more than 50% from the 2005-07 average.
In North America, shipments of the leading phosphate products climbed to a modern-era record of 10.1 million tons in 2012/13. We estimate that shipments will remain at elevated levels of 9.6 million tons in 2013/14 and 9.8 million in 2014/15. The seven-year Olympic average is 9.0 million tons. Shipments during the 2013 fall application season (Jul-Dec) were off about 11% from the record level a year earlier partly due to the later harvest, but movement still exceeded the seven-year Olympic average by 6%. We project that shipments during the spring application season (Jan-Jun) will equal the total last year and exceed the seven-year Olympic average by 6%.
Channel inventories in many countries were pulled down to low levels during the slow price burn of the last two years. India provides the best example. Our Delhi team estimates that destocking of wholesale and retail inventories likely will total about 2.4 million tonnes for the fertilizer year that ends March 31, 2014. As a result, we project that Indian DAP imports will rebound from an estimated 3.6 million tonnes this year to around 5.5 million tonnes in 2014/15. Indian buyers are not expected in the market until the second quarter, but the prospect of a nearly two million tonne rebound in imports is expected to keep fundamentals snug well into the second half of 2014.
On the supply side of the ledger, the cumulative impact of several small planned and unplanned outages has reduced nearby availability. For example, we took down the large No. 5 DAP granulation plant at our Riverview, FL complex for an extended turnaround at the end of November (or during what we expected to be a seasonally slow period!). Modifications will enable this unit to produce DAP, MAP or MicroEssentials ® once it is back online in early April.
The Ma’aden facility in Saudi Arabia also continues to ramp up at a slower-than-expected pace. Market publications have reported that the facility is operating at around 60% of capacity due to ongoing start-up issues at the mine, railroad and chemical plants. Finally, other planned and unplanned outages in Australia, Mexico, Tunisia and the United States as well as weather-related logistical disruptions in Morocco also have reduced or delayed shipments at a time when demand has perked up.
So, how will this knife fight end? Our assessment is that there is more upside than downside price risk in the near term given these recent developments as well as the prospect of continued tight fundamentals through the spring application season.
Chinese export economics, however, likely will set a ceiling later in 2014. China has lowered export taxes on nitrogen and phosphate products this year. In the case of DAP and MAP, the export tax during the peak domestic season was set at about $8 per tonne plus 15% of the fob port value. The peak season runs from Jan 1 to May 15 and from October 16 to December 31. The tax during the off-peak season that runs from May 16 to October 15 was set at $8 per tonne. Both the high and low tax rates are significantly less than those a year ago when the high rate was 80% and the low rate was 5% based on prices at the time.
Our Beijing team estimates that, given current raw materials and other costs, the breakeven price for the most efficient integrated Chinese DAP producers during this peak season is about $470 per tonne fob port. That is consistent with reports by industry publications in late January that Chinese exporters were offering DAP at $480 per tonne fob port and that the first ever export during the high-tax season was made to an Australian buyer at this level. We estimate that the breakeven price for non-integrated DAP produces is about $510 per tonne fob port during the current high-tax period.
Assuming no change in costs, the breakeven price for the most efficient integrated Chinese DAP producers during the off-peak season that begins on May 16 would drop to about $410 per tonne fob port. We estimate the breakeven price for non-integrated producers would fall to around $445 per tonne fob port during the off-peak season. If India ends up buying 5.5 million tonnes of DAP, Chinese producers are expected to supply significant volume during a narrow window, and part of this tonnage likely will need to come from higher cost producers.