OREANDA-NEWS.  New potash projects, especially low cost Former Soviet Union projects, will come to the market over the next five years, with excess potash placing pressure on prices, Fitch Ratings says.

The new projects will introduce new competitors vying for their place in the market. This will help keep prices down which will in turn favour low cost producers such as Uralkali (BB+/Negative) and Belaruskali and help them gain export market share. We see PotashCorp's EUR7.8bn offer for German fertiliser company K+S, whose Legacy project should begin production in 2016, as an attempt to maintain market share, production and therefore pricing influence in this increasingly competitive environment.

However, K+S has high costs relative to many global peers and the acquisition is therefore likely to affect PotashCorp's financial profile. Maintaining strong customer relations will be crucial for higher cost producers such as Mosaic (BBB/Stable), and to a certain degree PotashCorp, if they are to maintain market share. New projects should, however, enhance the credit profiles of Acron (BB-/Stable) and Eurochem (BB/Stable) as they become vertically integrated in potash. We expect Uralkali's 55-60% EBITDA margins to be able to withstand large falls in potash prices. Instead, the Negative Outlook on Uralkali's rating is a reflection of the company's aggressive financial policies.

The break-up of the BPC trading company (Uralkali and Belaruskali) caused a crash in potash prices in 2013 when Uralkali decided to adopt a volume-over-price sales strategy. This led to record global deliveries in 2014 as emerging markets stocked up on potash. We believe supply may outpace demand by around 8% in aggregate over the next five years. Combined with high emerging market stock levels this suggests continued low prices and our forecast is for prices to remain at around USD300 a metric tonne, with further pressure towards USD280/tonne once new capacities come on stream.

Uralkali and Belaruskali's world-leading cost positions mean both companies can continue to be competitive on prices and increase market share, especially as Belaruskali is now being permitted to sell to the U.S. market.

Excess supply over the next five to ten years is being driven by Eurochem's VolgaKaliy and Usolskiy 8.3 million tonne (mt) potash project. After 2020, Acron's VPC potash project (2.6mt) as well as Uralkali's new Solikamsk-2 mine (2.3mt) are also expected to come online. These projects are all lower down the potash cost curve than Canadian projects such as BHP Billiton's (A+/Negative) Jansen project and K+S's Legacy project, which are expected to have price floors of over USD300/tonne in order to meet return on capital.