By Leia Michele Toovey- Exclusive to Potash Investing News
The world’s largest potash export consortiums, Canpotex and Belarusian Potash Company, have signed agreements to supply potash to China, at higher than expected prices. Canpotex will supply China with 630,000 tonnes of the crop nutrient in the second half of 2011 at $470 per tonne, a 17.5 percent increase compared to the contract pricing agreed upon for the first half. Belarusian Potash Co. has agreed to sell a 500,000 tonnes and an option for 200,000 tonnes, priced at $470 on a cost-and-freight basis.
The price increase was a surprise to analysts, who had expected that $450 per tonne would be the agreed upon rate. When news of this unexpected price hike hit the markets Wednesday, the share prices of Canpotex members: Potash Corporation of Saskatchewan (NYSE:POT), Mosaic (NYSE:MOS) and Agrium (NYSE:AGU), rallied. Not only is the increased price for potash an optimistic factor for the market, the small contract volumes are being perceived as a sign of a tightening supply chain. In a statement, Canpotex added “The contract volumes are at the low end of the MOU range reflecting Canpotex’s tight potash supply position.” Last year, Canpotex signed a three-year memorandum of understanding with Chinese agricultural giant Sinofert. The new potash supply contract is the second contract concluded under the terms of that MOU. “Canpotex is now fully committed for sales in the third quarter of 2011, and has significant volumes confirmed for the fourth calendar quarter,” added the company.
As the ink dries on the new contracts between China, Canpotex and Belarusian Potash Co., the pressure is on India to step up to the plate and come to an agreement for the supply of Potash. Neither BPC nor Canpotex have been able to come to terms on an agreement with India, who is stalling, claiming that the current price for potash is more than the country can afford and still be able to stick to its current budget. India has even gone as far to say that unless either Canpotex or BPC are willing to sell potash to the country at a lower price, then the company may choose to completely forgo purchases, and therefore applications of potash to their fields, and instead rely on the fact that an application of potash can be skipped without having a large impact on crop yields.
The Chinese contract is a key contract, and is always closely watched by analysts, as other big potash importers typically pay a premium on the Chinese import price. China and India are two of the top buyers of BPC’s potash. BPC is a joint venture between Belaruskali and Russia’s Uralkali, newly merged with larger rival Silvinit. Now that the contract has been settled between China and BPC, there are rumours that BPC is close to signing a potash supply deal with a major Indian buyer at above $500 a tonne. If India agrees to a price of over $500 a tonne with BPC, then they will likely settle an agreement with Canpotex at a similar price point.
Canpotex has now sold out for the third quarter, and already has committed large volumes for the fourth quarter, a fact that Agrium spokesperson Richard Downey says is “putting the pressure” on Indian buyers that had been holding out, hoping for lower prices. The potash market, especially in times of tight-supplies is typically “first come, first serve”, and the customers who come to the table first generally get the best deal. Russian OAO Uralkali CEO Vladislav Baumgertner told reporters yesterday that his company would likely agree to sell its potash to Indian customers for a higher price than the $470 per tonne level it agreed on this week with Chinese buyers. Potash buyers from India have been in negotiations with Canpotex since the previous supply contract expired at the end of March. Asked whether he thought the Indians would ultimately have to settle for even higher prices than the Chinese agreed to for the second half, a Mosaic spokesperson said “historically, that’s what happened in the past.”