No quick end to potash doldrums in Saskatchewan as capacity ramps up

Oil's downfall may get more attention but the potash industry that forms the bedrock of the Prairie mining industry is going through its own bust and analysts say there's no quick recovery in sight.

Potash, the lightly coloured mineral used as a crop fertilizer,is big business in Canada. Last year, producers dug out $6.7-billionworth of it, putting it second only to gold in terms of producedmineral value in the country.

It's goingtotake a while for us to dig ourselves out of this hole.- DavidAsbridge,NPKFAS

But like oil, a wave of overbuilding and production increases inrecent years spurred by a spike in crop prices and a perceiveddemand that didn't quite materialize have left the market floodedwith supply.

"We have become grossly oversupplied with potash," said DavidAsbridge, president of fertilizer advisory firm NPKFAS.

"It's goingto take a while for us to dig ourselves out of this hole."

Drop in prices

The glut has led to a steep drop in prices, with the Potash Corp.of Saskatchewan reporting an averaged realized price in the secondquarter of US$154 per tonne, compared with a brief peak of aroundUS$900 a tonne in 2008 and still overUS$400 just a few years ago.

The fallout has been mine closures, layoffs and a big cut ingovernment revenue as companies try to preserve their cash and stayprofitable, said Brooke Dobni, a professor at the University ofSaskatchewan's Edwards School of Business.

"They're doing everything from A to Z, from closing plants,reducing production, (to) cutting dividends to shareholders," saidDobni.

The Mosaic Co. cut 330 jobs last month when it suspendedproduction at its potash mine near Colonsay, Sask., while PotashCorp. has instituted some temporary closures at mines in theprovince to reduce supply.

• Mosaic potash mine layoffs will have 'devastating' impact, says union president

In early August, Karnalyte Resources Inc. said it had failed tosecure funding for the US$700-million phase one of its proposedpotash mine near Wynyard, Sask., while last fall Brazilian mininggiant Vale stopped development of its $3.5-billion potash mine nearKronau, Sask.

Australian heavyweight BHP Billiton has also cut back staff anddevelopment spending at its massive Jansen potash project, with noclear timeline for production.

Lost revenues

For Saskatchewan, the reduced prices mean lost revenues, with theprovince pulling in $552 million in the 2015-16 year, $244 millionless than expected. This year the government is expecting revenue todrop further to $450 million,though it will still make up 3 percent of budget revenue.

• Sask. deficit $675M last year, 58% higher than previous estimate

The government isn't expecting any quick turnaround in priceseither, projecting a price of US$205 per tonne for this year andclimbing only to US$221 per tonne by 2020.

The effects are being felt outside of Saskatchewan, with PotashCorp. making the drastic decision to close its Picadilly mine in NewBrunswick in January, putting 430 people out of work.

• Laid-off PotashCorp workers from Sussex head west

And Canpotex, the marketing body for Canadian potash producers,decided in June not to go ahead with a $775-million port expansionin Prince Rupert, B.C.

Unbalanced market

But the measures haven't been enough to balance the market, saysPeter Prattas, an analyst at AltaCorp Capital, because companiesalso continue to add supply.

Potash Corp. and Mosaic are working to wrap upmulti-billion-dollar expansions, while K+S Group plans to startproduction at their new Legacy mine near Moose Jaw, Sask., nextyear.

• K+S Legacy mine in Saskatchewan nearing finish line

Prattas says more capacity will have to be cut for prices torecover.

"There will need to be some further mine closures at some pointin order to bring the overall market in balance, but the process isa slow one because no one wants to give up volume," said Prattas.

Not only are companies reluctant to give up production, but someare still pushing to start developing new mines.

Yancoal, owned by Chinese firm Yanzhou Coal Mining Co., islooking to develop a mine near Southey, Sask.

• Environmental nod for Yancoal potash proposal disappoints area residents

The mine has faced some local opposition, but the Saskatchewangovernment approved its environmental assessment earlier this weekand company spokeswoman Robin Kusch said the long-term outlook isstill good.

"We're very optimistic," said Kusch. "The potash resource thatis there is attractive, and in terms of the potash price,
projections in line with production in 2021 are favourable."

She said the company expects to make a final investment decisionon the project this fall.