OREANDA-NEWS. S&P Global Ratings said today that it has placed its 'BBB-/A-3' long - and short-term corporate credit ratings and all its issue ratings on German potash and salt producer K+S AG on CreditWatch with negative implications.

The CreditWatch placement results from continued weak selling prices on international potash markets, combined with operational constraints at K+S' operations in Germany. So far this year, potash prices have been $30-$40 below our projections--with key benchmark contracts being signed by K+S' competitor JSC Belaruskali with major customers from India and China at $227 and $219 per metric ton, respectively. This was due to the weakened supply-demand equilibrium and expectation of further capacity start-ups in 2017-2018.

Over the coming weeks, we will meet with K+S' management to discuss potential mitigating actions, progress on the ramp-up of the company's important Legacy project, and review the second-quarter results, due to be published on Aug. 11, 2016. We will also evaluate any statements from key potash producers regarding production cuts to match supply with demand in the short to medium term, such as The Mosaic Co.'s announcement regarding the idling of its 2.6 million metric ton per year capacity Colonsay Potash Mine in Saskatchewan, Canada.

In addition to lower average selling prices in K+S' Potash and Magnesium business unit than we previously anticipated, overall performance is under pressure because of unexpectedly high production outages, due to the limitation of saline wastewater disposals at K+S' Werra plant, which led to a decrease in sales volumes by 400,000 metric tons year on year, as of June 2016. This decline is well beyond our previous forecast of a 300,000 metric ton decrease for the whole year. Furthermore, the Salt business unit faces significantly lower sales volumes in North America. The company has also warned that its operative result in the second quarter of 2016 will be well below that of the previous year.

K+S' credit metrics in the coming years are highly dependent on the timely commissioning and ramp-up of the Legacy greenfield project. Following the recently reported collapse of the holding structure of a crystallizer unit, we are evaluating the implications for Legacy, additional capital expenditure (capex) requirements, and the company's free operating cash flow generation.

The CreditWatch reflects at least a 50% probability that we will lower our rating on K+S by one notch over the coming weeks.

We currently expect to resolve the CreditWatch by the end of September, following our analysis of price developments in the potash market for the remainder of 2016 and over 2017-2018, and our review of management's action plan to mitigate risks related to the saline wastewater disposal limitations at the Werra plant, and the commissioning and production schedule at Legacy.

We will likely downgrade K+S by one notch if we believe that the company's FFO-to-debt ratio is unlikely to improve toward 30% over 2017.