China Contract Still Eludes Potash Industry as Prices Slide

  • Annual accord could be skipped for this year, VTB Capital says
  • Moscow conference attendees don’t see deal anytime soon

China, the world’s largest consumer of potash fertilizer, still hasn’t signed an annual benchmark supply contract with foreign producers, spurring speculation that no agreement will be reached this year and that prices have further to fall.

Contracts were informally discussed by suppliers and buyers including China at the annual International Fertilizer Industry Association conference in Moscow this week, said two fertilizer-producer managers who attended the event and who asked not to be identified as the matter is private.

The managers said they don’t expect a contract to be signed soon. An agreement may be reached at the end of the summer but there’s a high chance of no deal at all, said Elena Sakhnova, a VTB Capital analyst in Moscow. The last time both sides failed to reach a supply contract was in 2009, a move that hastened a plunge in potash prices from a peak the previous year.

“China sits on above-normal inventories of up to 5 million tons, domestic production is running at full speed and railway deliveries from Russia as high as 120,000 tons per month continue, so the country is not in a rush,” Sakhnova said in an interview.

The potash industry is grappling with an oversupply of the crop nutrient, which is used help plants endure dry conditions. Spot prices in Brazil, typically a guide for Chinese contract prices, have tumbled more than 20 percent this year to $220 a metric ton as of May, according to Bloomberg Intelligence data, the lowest since 2007. China agreed to buy potash at $315 a ton for 2015. China is likely bidding for a contract this year at less than $200, RBC analyst Andrew Wong said in a note.

The price that China usually agrees to at the start of each year with Russian, Belarusian and North American suppliers is a benchmark for suppliers and customers around the world. The biggest sellers are Russia’s Uralkali PJSC, Belaruskali in Belarus, and Canpotex Ltd., an export joint venture formed by North American producers Potash Corp. of Saskatchewan Inc., Agrium Inc. and Mosaic Co. If no Chinese contract is signed by the fall, market prices may go below the psychologically important level of $200, VTB’s Sakhnova said.

Mosaic Chief Executive Officer Joc O’Rourke said Friday there are active talks between China and Belarus and that while there’s no guarantee of an accord, one will probably be reached in “the next little while." Speaking at a New York investor presentation after returning from the Moscow conference, he said Chinese officials are under increasing pressure to do a deal.

"My guess is in the next couple of weeks those guys are going to get together and do some serious negotiation," he said.

Potash suppliers may reach a deal with India earlier than China this year, according to VTB. While the nation has inventories, it may start talks in July and sign in early August in hopes of getting better pricing before China reaches a deal, Sakhnova said.

Uralkali, the world’s largest producer by volumes, declined to comment on the contract talks.

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