The new potash benchmark price for the first half of 2014 has been set. Uralkali (MCX:URKA), Russia’s top potash producer, has hacked 24 percent off its potash price in a new semi-annual supply deal with China, the world’s largest potash consumer. The deal will see Uralkali ship 700,000 metric tons (MT) of the crop nutrient to China for $305 per MT.
Since Uralkali’s split with Belaruskali last July, the potash market has been at a standstill. But the latest contract prices suggest that the Russian producer is looking to set a new floor for global prices. The new benchmark is significantly lower than last year’s contract price of $400 per MT. However, according to Reuters, the price is “not far removed from the levels prevailing in the spot market since July.”
“The contracts between Uralkali and the Chinese companies clearly testify to growing demand and the beginning of market recovery,” Oleg Petrov, Uralkali’s head of sales, said.
On the subject of the latest transaction price, Peter Prattas, a Toronto-based analyst at Cantor Fitzgerald, told Bloomberg that “[i]t’s a definitive price point that people can look at and use as some sort of floor price,” adding that “[b]uyers have been waiting for something like this as a catalyst so they can start buying again.”
The Globe and Mail reported that in the past, both China and India have played hardball when it comes to squeezing the best price out of the major potash producers, typically by delaying their purchases. Up until last year, the countries didn’t see much success with that strategy, but since the fall of the potash market, it seems that they might finally get their way. The collapse of BPC, according to Michael Levshin, an analyst with Veritas Investment Research, weakened the potash cartels and increased China’s bargaining ability significantly. That in turn could mean that price increases could be difficult to come by in the future.
“This was a very good deal for the Chinese,” Levshin told The Globe and Mail, “[i]t’s the least China has paid for potash in more than half a decade,” he said.
On the other hand, the deal is also a good one for the Russians. Speaking with the Bloomberg, Konstantin Yuminov, a Raiffeisenbank analyst in Moscow, stated that “[t]he deal is very positive for Uralkali as the volume is good and price is good,” adding that “[i]n this deal, the Chinese buyers took 70 percent of what was negotiated last year together with Belarus, and Uralkali can sell additional volumes by rail on top of that.”
As far as potash prices on the whole are concerned, the supply deal between Russia and China gives producers and buyers a benchmark price that could result in reviving global demand for potash.
However, it seems that at the moment, the feeling on where the market could go is still up in the air. According to Reuter’s market sources, whether the benchmark is good news or bad news is unclear because “this price is not very different from the current reality.” However, the feeling is that the new price will create a benchmark that could spark momentum.
According to the source, India could be looking at a premium to China’s contract price of $15 to $20 per MT or more for potash when its contracts wind up in the next few weeks.
Towards the end of 2013, the Chinese spot price for potash was between $303 and $305 per ton.
Securities Disclosure: I, Vivien Diniz, hold no investment interest in any of the companies mentioned.