This week has not been a good one for Belarus state-owned potash producer Belaruskali OAO and its potash marketing/exporting arm Belarusian Potash Co. (BPC).
On Jan.
10, major offtaker Yara International ASA announced that it planned to stop
buying potash from Belarus, and had started winding down its sourcing of
Belarusian potash. The company expects the wind-down to be completed by April
1.
On Jan.
12, the Lithuanian government reached a decision to end the railway transit
contract between the country’s state-owned railway company, Lietuvos
Geležinkeliai’s (LTG), and Belaruskali over national security concerns, effective
Feb. 1.
Furthermore,
any future intermediary for the potash producer seeking transit via Lithuania’s
rail system would need approval from the country’s National Security Commission,
Lithuania’s Transport Minister Marius Skuodis said, as cited by a Bloomberg report.
While
Lithuania’s move to end the rail transit of Belarus potash had been widely
anticipated (GM Jan. 7, p.1; Dec. 31,
17, & 10, 2021), the timing of the rail contract termination is sooner than
some had expected.
For
Belarus, the Lithuanian ruling means Belaruskali/BPC are losing their key
potash export route, as most of Belarus’ potash for export is railed via
Lithuania’s rail system for onward shipment from the Lithuanian port of
Klaipėda.
The
port shipped almost 10.7 million mt of Belarus potash in 2020 via the Biriu
Kroviniu Terminalas (Bulk Cargo Terminal [BKT]) terminal, according to LTG (GM July 2, 2021). Belaruskali owns a 30
percent stake in the BKT terminal.
Belarus’
total potash exports in 2020 were 11.8 million mt, according to Trade Data Monitor (TDM).
Lithuania’s
railways have continued to transport Belarusian potash despite U.S. sanctions
on Belaruskali coming into force on Dec. 8. following a four-month wind-down
period (GM Aug. 13, 2021). Additional
U.S. sanctions on BPC were imposed on Dec. 2, which was not included on the
initial U.S. sanctions list. They come into effect on April 1, 2022 (GM Dec. 3, 2021).
The
U.S. sanctions do not cover Lithuania itself, but – as with European Union
(E.U.) sanctions against the Belarusian regime – many Belarusian banks are
under sanction. U.S. financial entities are prohibited from doing business
connected with Belarusian potash, and consequently, they can no longer process
Belaruskali’s financial transactions.
Green Markets Research Director
Alexis Maxwell said the impact of Lithuania’s decision to end the Belarus key
potash transit route is more limited for the U.S., as U.S. imports from Belarus
are only some 6 percent of U.S. potash demand.
However,
the decision will have a significant effect on Belarus’ shipments to Asia,
particularly India and China, and to Brazil – regions that rely on U.S.
financial institutions to provide letters of credit and insurance, she said.
The E.U. sanctions imposed against the Belarusian regime came into force on June 25 (GM June 25, 2021) and restrict imports of Belarusian potash into E.U. countries and implement a transit ban via E.U. countries, of which Lithuania is one, but Belarus’ 2021 supply contracts with India and China – i.e., those concluded before June – were not subject to the Brussels sanctions.
Crucially,
a key grade of Belarusian potash also was excluded from the E.U. ban. Potassium
chloride with a potassium content evaluated as K2O by weight,
exceeding 40 percent but not exceeding 60 percent on the dry anhydrous product,
is not included on the sanctions list.
The
Belarus supply contract with China expired in December, and Maxwell said
Belarus “is [now] in dire need of customers” after the supply
contract expired.
“China
is the largest global buyer of potash able to finance trade with a
U.S-sanctioned company,” said Maxwell. “That means Beijing is in a
better negotiating position and is able to leverage a Belarus contract for less
than the Southeast Asian spot market price.”
But
with Belarus currently accounting for around 20 percent of global potash trade, Lithuania’s decision to remove the key export route
for Belarusian potash will undoubtedly put further pressure on global potash
prices and other fertilizer prices and stoke further worries about food price
inflation, which already is near an all-time high.
Belarus
had signalled earlier it could opt to redirect its potash for transit via
Russian ports, including the Russian Baltic port of Ust-Luga and the port of
Murmansk. Belarus turned to Russian ports for shipment of oil products after
they were included on the E.U. sanctions list against Belarus last June.
Belarus claims the equivalent of 1 million mt/y of its oil product exports is now
being routed via Russia following an agreement with Russia, according to local
media reports.
According
to Belarus Minister of Transport and Communications Aleksei Avramenko, as cited
by a BelTA news agency report last
August, the routes for potash transit via Russian ports have been worked out.
However, some analysts have pointed to the much bigger volume of potash to be
transhipped compared with Belarus oil products.
According
to an article by Belarus pro-democracy and pro-human rights news site Charter97, when transported through
Russia, the distance to the ports stretches to 1,096 km (500 km of it in
Belarus) instead of 715 km (287 kilometres of it in Belarus) to Klaipėda.
According
to the article, which was published last September, Belarusian Railways
estimates the increase in delivery price using Russian ports is “at three
to four dollars per mt.” However, the article did not indicate when this
was calculated.
It is
also unclear whether there is spare transhipment capacity at Russian ports for
additional potash transhipment, and it is likely that what spare or new potash
transhipment capacity there is would first of all be reserved for Russian
potash exporters.
Moscow-based
VTB Capital analyst Elena Sakhnova also noted that Moscow may be reluctant to
agree to the transhipment of Belarus potash across its territory due to U.S.
sanctions.
Kremlin
spokesperson Dmitry Peskov on Jan. 13 refrained from responding to journalists
whether Russia is prepared to transport potash from Belarus, saying “it is
a sensitive issue,” Interfax and
Russia’s Tass reported. However, the
spokesperson also said that Russia “will not abandon its partner.”
In its
Jan. 10 statement announcing it planned to stop sourcing potash from Belarus,
Yara said: “Although sourcing from Belarus is in full compliance with
applicable sanctions, other parts of the supply chain are withdrawing essential
services required to enable potash exports from Belarus, as a result of which
Yara has initiated a wind-down of its sourcing activities of Belarusian
potash.”
“[Yara’s
withdrawal] will have a really big impact on Belarus, as it sells about 40
percent of its output in Europe, mostly to Yara,” Bloomberg cited Sakhnova as saying in a phone call.
“It
will be really hard to replace Belarus’ volumes should other clients,
especially in Latin America, also start to wind-down,” Sakhnova said.
Yara
previously has said it has flexibility in its potash supply options. The
company said it has “a broad portfolio of potash suppliers” and “continuously
maps alternative supply options to be able to respond to supply chain
disruptions” (GM Aug. 20, 2021; May
28, 2021).
Yara
International President and CEO Svein Tore Holsether said last year a change of
supply arrangements “could have a cost, but as a large and stable potash buyer
we are typically able to secure competitive terms.”
In the
past several months since the disputed re-election of Alexander Lukashenko as
Belarus president on Aug. 9, 2020, the Norwegian company said it has sought
positive change by leveraging its presence in Belarus to promote occupational
safety and human rights. Last August, Yara said it would make a decision on its
further presence in Belarus by December. In its statement this week, it said
will continue to monitor for any changes in the situation, including sanctions,
as part of its ongoing sourcing operations.
Yara’s decision to wind down purchases of Belarusian potash amid tighter U.S. sanctions, as well as Lithuania’s decision to halt rail transit of Belarusian potash, not surprisingly, is seen as supportive for potash prices, and, in turn, for global “potash players” including ICL, Mosaic, and Nutrien, Moscow-based VTB Capital Equities analyst Artem Vodyannikov said, as cited by a Bloomberg report.
Belarusian authorities last month warned that “Belarus is ready to take measures in response” if Lithuania halts the transit of potash via its territory, and in particular, that Belarus “can block the railway transit in the direction of Lithuania, which is also a transit state,” according a report by Belarus’ tvr.by. (GM Dec. 24, 2021).
Belarus
also has warned that it does not rule out banning the sale of Belarusian goods
to Lithuania as a potential response if Lithuania were to stop the transit of
Belarusian potash, according to the Belarus state-run news agency BelTA.
Belarus
said BPC “will use all legal means to protect its rights, if Lithuania
violates international agreements,” according to tvr.by.
The
Belarusian authorities also warned that Lithuania may face
“multibillion” lawsuits if the transit of Belarusian potash and
fertilizers is banned, according to the tvr.by
report.
Belarus
said “most of the customers” will file lawsuits if they are left
without goods and incur considerable losses “because of the actions of
Lithuania,” as they will have to buy at higher prices.
In a
further turn of the screw on the Lukashenko regime, it is reported that this
week Lithuania is lobbying for tighter E.U. sanctions on Belarus’ potash
industry in order to cap the higher profits being made by the Belarus regime
after the introduction of sanctions, which had “the unwanted effect”
of higher prices, according to a Bloomberg
report, citing Lithuanian Foreign Minister Gabrielius Landbergis.
Lithuania
wants the key grade of Belarusian potash currently not on the E.U. ban list –
potassium chloride with a potassium content evaluated as K2O by
weight, exceeding 40 percent but not exceeding 60 percent on the dry anhydrous
product – to be covered by the sanction restrictions.
The
Belarus potash grades under current E.U. sanctions make up only about a fifth
of Belarusian potash sales to the Bloc, Landbergis told Lithuania’s LRT
broadcaster, as cited by the Bloomberg report.
But
while the sanctions imposed by the U.S., the E.U., and certain other countries,
including Canada, the U.K., and Switzerland, on Belarusian potash are part of a
raft of measures designed to put more pressure on the Lukashenko regime, it
likely will be the ordinary people of Belarus that will be the hardest hit by
the loss of potash export revenues.
Lithuanian
companies and the country’s government also will take a major hit from the loss
of revenue following the loss of Belarus potash cargoes.
The
former CEO of LTG, Mantas Bartuška, last year estimated the rail company alone
would lose around €60 million in annual revenue, and Lithuania’s entire
logistics chain would lose over €100 million in revenue without Belarus potash
cargoes.
The
biggest winner is likely to be the Russian Federation: the Russian potash
companies, the Russian port and rail companies, and others involved in the
transportation chain, as well as Moscow.
