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Morningstar | K+S Will Benefit From Higher Potash Prices as Low-Cost Bethune Mine Ramps Up

K+S has a middling cost position for its commodity products--fertilizer and salt--and as such, lacks a cost advantage. With high-cost potash mines in Germany and a low-cost mine in Canada, K+S sits in the middle of the muriate of potash (MOP) industry cost curve. While K+S has a lower-cost position in the specialty fertilizer sulfate of potash (SOP), some of its competitors are lower on the industry cost curve. The company is also the world’s largest supplier of salt, but in general, its mines lack the geologic advantages that lead to low costs.K+S has lowered its position on the potash cost curve through the development of the Bethune mine in Saskatchewan. However, the benefits of this lower cost mine are partially offset by a continued decline in nutrient quality at the company's older German mines. Further, we are concerned that the high capital costs associated with the project will weigh on the company’s return on invested capital in a lower potash price environment. We forecast potash prices to be $310 per metric ton (in nominal terms) by 2025, up from $300 in 2019, as capacity expansion from lower-cost players will fill the majority of future global demand growth, which will effectively cap returns for middle- and higher-cost producers and reduce returns on expensive greenfield projects.The firm’s salt segment sells over half its volumes for use as deicing salt, which exposes the segment to climate change risk. One effect of climate change is for climates to shift north, which brings warmer weather and fewer snow days to northern climates. As a result, we expect a small decline in normal deicing salt demand due to less snow over time and limited prospects for sustained price increases. Deicing salt is a commodity with a low value/weight ratio, and transportation costs make up a significant portion of total delivered costs to the customer. As such, the company’s inland markets in North America and Europe don’t face the threat of low-cost imports, and the competitive dynamics are regionalized. However, K+S also serves the East Coast of North America, where lower-cost waterborne imports are a threat.