China and India are set to negotiate the biggest price cut in three years to buy potash as they break a deadlock in meetings with Russian and North American producers that dominate the $24 billion market for the crop nutrient.
Indian talks have begun and China could start in January or February, said Oleg Petrov, marketing director for Russian supplier OAO Uralkali. The countries may pay as little as $430 a ton, down at least 8.5 percent, according to analysts at Credit Agricole Securities USA, Dahlman Rose & Co. and Goldman Sachs Group Inc.
The price Asia’s biggest consumers pay in the 50 million- ton-plus potash market provides a global benchmark for other contracts. China delayed regular shipments since a $470-a-ton accord expired June 30 while India’s last contract, for $490, concluded at the end of the first quarter, with supplies to the countries continuing through the third quarter. The two most- populous nations put off new accords since then with the aim of getting cheaper supply. That left farmers to rely on inventories of the mineral used to strengthen roots and protect against droughts.
“It comes down to the negotiating power of these very large purchasing blocks,” Steve Hansen, an analyst in Vancouver at Raymond James Ltd., said by telephone, referring to China and India. “They’re not reluctant to capitalize on that power.”
Producers had responded to the months-long deadlock in meetings with production cuts that will protect prices from an even steeper decline. Berezniki, Russia-based Uralkali, the largest shipper by volume, according to data compiled by Bloomberg, plans to cut output by half between December and March.
“There’s some acceptance by the producers that the price comes down and then they’ll get the offset of more demand and get higher earnings,” said Colin Isaac, a London-based analyst at Atlantic Equities LLP. “But we’ve seen in the past they’d rather just close production than accept a very low price.”
Potash Corp. of Saskatchewan Inc., the world’s largest fertilizer producer by market value, in October and November announced the idling of a total of four mines for eight weeks. It also predicted 2013 shipments of 57 million to 58 million tons, compared with a September view of as much as 60 million tons.
India’s fertilizer industry is holding out for cheaper supplies after a cut in government subsidies and a weaker rupee raised the cost of imports, Isaac said in a Dec. 18 interview.
“From the potash producers’ perspective, India and China are playing chicken,” said Jason Miner, a Princeton, New Jersey-based analyst at Bloomberg Industries. “The India-China perspective is, ‘We don’t need as much, we have inventories and other alternatives.’”
Demand for the potassium-based salt is elastic because farmers can skip an application for a season if they choose and rely on residual traces of the nutrient in the soil. Some did just that after potash soared to more than $800 a ton in early 2009, with prices subsequently collapsing. Spot prices in Vancouver slumped 48 percent that year, World Bank data show.
India, with no indigenous potash resources, imports about 3.5 million tons a year, down from about 6.5 million before the global financial crisis, according to Uralkali’s Petrov.
Lower imports will hurt India’s agricultural output by denying crops the nutrients they need, undermining the country’s goal to feed itself, Potash Corp. Chief Executive Officer Bill Doyle said in a Dec. 11 telephone interview.
“It’s having an impact on crop yields, which means you’re producing less food, you’re having higher food prices and you have higher food inflation,” Doyle said. He declined to comment on contract talks or price expectations.
Potash Corp. rose 0.1 percent to C$40.05 today in Toronto while Calgary-based potash producer Agrium Inc. (AGU) climbed 1.5 percent to C$98.47. U.S. competitor Mosaic Co. (MOS) fell 0.9 percent at $55.45 in New York.
Potash Corp. has dropped 4.9 percent this year, Agrium is up 44 percent and Mosaic has gained 10 percent. Uralkali is up 11 percent in London.
India has 700,000 tons of potash in inventory, enough to satisfy demand until early March, said P.S. Gahlaut, managing director of Indian Potash Ltd., the country’s largest buyer. It will then need 3 million to 3.5 million tons of potash to last through 2014, he said in a Dec. 12 interview.
Gahlaut said a delegation of Indian government and industry officials will travel to Russia in the first week of January for talks with Belarusian Potash Co., also known as BPC, which negotiates sales for Uralkali and Belarus potash producer Belaruskali.
“There is no hurry in signing potash import contracts,” Gahlaut said. Talks with Canpotex Ltd. -- the offshore marketing arm that represents Potash Corp., Agrium and Plymouth, Minnesota-based Mosaic -- will begin later, he said.
Canpotex and Agrium declined to comment on the contract talks. Rob Litt, a Mosaic spokesman, declined to comment ahead of the release of the company’s quarterly earnings on Jan. 4.
BPC and Canpotex together account for about 63 percent of worldwide potash supply and 73 percent of exports, Adam Samuelson, a New York-based analyst at Goldman Sachs, said Dec. 11 in a note. Canpotex is allowed to exist under Canada’s Competition Act, the country’s antitrust legislation, because its business only relates to the export of products from Canada.
An accord at $430 a ton would represent a 12 percent drop from India’s last contract and an 8.5 percent for China. That would be the biggest decline in Indian prices since Canpotex and BPC agreed to a 26 percent reduction in July 2009, and the largest cut in China since December of that year, according to data compiled by Bloomberg.
Not everyone is forecasting much of a decline. India will end up agreeing to pay $460 to $470 a ton, according to Elena Sakhnova, a Moscow-based analyst at VTB Capital, although she also said that the country’s buyers will wait until a government review of potash subsidies March.
“Uralkali’s recent cuts on production reflect our higher expectation on the price curve, as we believe the current levels at some markets do not truly reflect the industry fundamentals,” Uralkali’s Petrov said in a Dec. 10 e-mail.
Since its last supply contract ended, China has received some Russian imports by rail. Petrov said in an interview last month that his company may temporarily cut those consignments at the start of 2013 to help prop up prices.
“The importers’ pattern is to have the negotiations pushed out,” said Spencer Churchill, an analyst at Paradigm Capital Inc., who estimates India may agree to pay as little as $400 a ton. “I wouldn’t be surprised to see even more delays.”