U.S. sanctions targeting Belarus' potash sector are sowing chaos through broader fertilizer supply chains as analysts and industry grapple with uncertainty over how much supply will get to market.

Belarus accounted for about 17.6%, or 12.2 million tonnes, of global production of potash, a key ingredient in fertilizer, in 2020. The country lost access to key shipping routes, however, after the U.S. slapped sanctions on state-owned JSC Belaruskali and its potash-exporting arm, Belarusian Potash Company JSC, in December 2021. The U.S. sanctions were imposed in response to the "blatant disregard for international norms and the well-being of its own citizens" by Belarus President Alexander Lukashenko's government, the U.S. Department of the Treasury said in a Dec. 2, 2021, news release.

As of Feb. 1, Lithuania stopped letting Belarus use the port of Klaipeda, largely in response to the U.S. sanctions. Analysts said the Lithuanian port handled over 90%, or about 10.8 million tonnes, of Belarus' annual potash exports and left land-locked Belarus with few avenues except Russia to ship one of its critical exports and sources of revenue.

Fertilizer prices had already been on the rise before the sanctions took hold, and further increases could put pressure on a food supply chain already strained by the pandemic. The World Bank raised fears of food prices driven up by soaring fertilizer costs in November 2021.

"It's not entirely clear what they're going to do or where they're going to send their tonnes," said CRU Group fertilizer analyst Humphrey Knight. "If you imagine the oil industry losing Saudi Arabian production in a very short space of time, there would be a pretty large reaction. This is kind of the potash equivalent."

Exactly how much of Belarus' 2022 potash output could fail to reach market is unclear. Knight said putting a firm figure to the supply shock is "very difficult." Raymond James analysts cited an annual number in the 1.5-million-tonne to 2-million-tonne range.

Uncertainty over Belarusian supply comes amid near-record-high potash spot prices, which Knight noted tripled in some markets last year and were near record highs set in 2008 and 2009. Knight and other analysts expect prices to remain high amid strong demand, Belarus' export woes and growing geopolitical tensions over Russia's buildup of troops near Ukraine's border.

Alternative routes

Belarus could potentially use the port of Ust-Luga in Russia, which has access to the Baltic Sea and is located near St. Petersburg, a few hundred kilometers from the Belarusian border. But analysts said Ust-Luga could only handle a fraction of Belarus exports. In terms of shipping routes, analysts said they expect Belarus to depend on multiple avenues to try to make up for the loss of Klaipeda. Belarusian Potash Company "may have to create several new supply routes to maintain export levels, at higher cost and with longer lead times," said CIBC analysts in a Feb. 6 note.

"Trying to recreate supply routes, in a matter of moments, in a completely different part of the world, is going to be very challenging and going to take some some time to establish," Knight said.

Using smaller ports like Ust-Luga may also increase costs. Raymond James analysts noted that using Ust-Luga could add $25-$30 per tonne of potash in logistical costs. Further, the analysts said Belarus may have to make capital investments at shipping centers to handle the sudden surge in volume and that it was also unclear how much slack there is in Russia's rail system to transport Belarusian potash.

"At this juncture, we understand that no volume of magnitude has moved via one of these potential new options," the Raymond James analysts said.

Knight noted the port of Klaipeda could take over a million tonnes of Belarus exports a month, an amount that analysts see as impossible for any one shipping center in Russia to handle.

"Based on the limited information available, it appears the spare capacity is very limited," Knight said. "We could be talking about a very, very significant decline in Belarusian potash availability as a result."

Supply response

Belarus' competitors are keenly watching the situation unfold and weighing options to meet gaps in demand. But the question of ramping up output is tricky, as miners will not want to make significant capital investments should the supply shock prove temporary.

"We're looking at this and wondering, with all the uncertainty around it, how long will this last?" said Ken Seitz, interim president and CEO of fertilizer giant Nutrien Ltd., on an earnings call. "We're trying to avoid building [a] church for Easter Sunday."

But should the situation have a longer-term impact, Nutrien could ramp up production "by hiring additional employees and incurring some small incremental capital expenditures," Seitz said.

Buyers are already looking to workarounds to buy Belarusian potash. India is reportedly considering Belarusian potash purchases using a rupee account to avoid U.S. and similar European sanctions.

But other key customers have ended purchases, citing the U.S. sanctions, with Norwegian fertilizer-company Yara International ASA saying in January it would "wind down" purchases from Belaruskali.