OAO Uralkali, the largest potash producer by output, predicted China may switch to the spot market to secure supplies because of a reluctance to be tied into long-term contracts.
“The Chinese market is moving in the direction of becoming a spot market,” Oleg Petrov, director for sales and marketing at Uralkali, said in an interview. “It may even happen next year.”
Stockpiles in China of potash, a form of potassium used to strengthen plant roots and protect against drought, rose 11 percent through the end of August from the previous year to 4 million metric tons, according to Uralkali. That undermined efforts by Uralkali, Potash Corp. of Saskatchewan Inc. and other producers to renew contracts with buyers in China, which imports about a fifth of global shipments.
China will only be interested in signing a new contract when domestic inventories of the crop nutrient fall below 3 million to 3.5 million tons, Petrov said. That’s unlikely before the first quarter, he said.
Uralkali’s global depositary receipts fell the most in more than a week, closing down 0.8 percent at $37.54 on the London Stock Exchange. They have gained 4.3 percent this year, valuing the company at $22 billion.
Brazil may experience a “big explosion” in demand in January in advance of the winter season, Petrov said. The Latin American country, where spot potash prices reached about $480 a ton in November according to a researcher, will spearhead demand growth next year, according to Uralkali.
“The market will buy early again in order to avoid heavy costs and logistical” issues such as bottlenecks at Brazilian ports before the summer season, Petrov said.
China consumes about 8 million to 9 million tons of potash a year, while it only produces 5 million tons, according to Uralkali. In volume terms, China accounted for 30 percent of Uralkali’s sales in the first half of 2012, with Brazil lagging behind at 12 percent and India at 8 percent.
Bank of America Corp. has set 2013 contract potash price forecasts for China at $420 per ton, down from the last contract price of $470, according to a Nov. 12 report.
“According to the reports, Chinese domestic prices have been lately around $400 per metric ton,” said Petrov. “We don’t think these price levels truly reflect the fundamentals of the potash industry.”
Uralkali and Silvinit, which merged last year, delivered about 2.3 million tons of potash to China in 2011, including rail shipments. Volumes sent by rail may be temporarily cut at the start of 2013 to prop up prices, according to Petrov.
Uralkali is “more optimistic” about India where a long-term contract may be signed in January or even earlier for one year or six months, Petrov said.
“The general increase in demand on the spot market in the beginning of 2013 may push prices up, motivating Indian partners to consider a timely conclusion of the contract,” Petrov said. Uralkali is keeping the previous contract price of $490 as a reference for future deals, he said.
Indian market volumes plunged from the 2008 pre-crisis level of 6.5 million tons to 3.5 million tons, according to Uralkali. Belorussian Potash Co., a trading joint venture of Uralkali and Belaruskali, traditionally accounts for a half of Indian imports.
“We expect the market to come back to the previous level of 6.5 million tons after 2014,” Petrov said. “Indian farmers have been disproportionately applying big volumes of heavily subsidized nitrogen fertilizers in the past several years, while potash and phosphate consumption has dramatically declined,” he said.