FocusGlobal Potash market in limbo ahead of contract settlements

17 June 2009 17:14  [Source: ICIS news]

By Carl Roache

LONDON (ICIS news)--Global potash trade is depressed as buyers and sellers struggle to find common ground during the key contract negotiations in India and China, sources said on Wednesday.

The Indian and Chinese contract settlements represent important price references for global potash trade.

With this year’s contracts yet to settle, buyers in all regions have little confidence in current price levels and, therefore, refuse to purchase anywhere near normal quantities of potassium chloride (MOP).

“We are in some talks but people [buyers] are waiting, thinking that prices may fall,” explained one supplier to Europe.

In 2008, a $355/tonne (€256/tonne) contract price increase was agreed by the Indian fertilizer purchasing agencies, which include Indian Potash Limited (IPL).

Meanwhile, a $400/tonne hike was accepted by the Chinese state buyers Sinochem and CNAMPGC.

The magnitude of these increases reflected a market characterised by record high spot prices, soaring demand and over-stretched supply.

The fall in crop prices since 2008 has seen potash demand slump dramatically and farmers have refused to continue paying record prices for potash. Faced with mounting stocks, producers have been forced to introduce substantial production cuts.

Despite the stark deterioration of the market, producers to date, appear unwilling to concede lower prices than those agreed last year when potash demand was soaring.

Nonetheless, buyers across several regions expect lower prices will eventually be agreed by the Indians and Chinese, which will then prompt a price reduction globally.

As such, buyers remain largely unwilling to commit to MOP at the prices currently targeted by producers and many are seeking large price decreases.

Several importing markets had high stock levels entering 2009, which has also contributed to the inactivity seen so far this year.

The potash market lacks a clear pricing structure, but potential agreements in India and China seem some way off due to varying buy and sell price ideas.

“For the time being talks have stopped,” explained one producer referring to its Chinese contract talks.

Belarusian Potash Company (BPC) initially offered a $50/tonne increase on last year’s $570/tonne FOB (free on board) agreement, but this was refused by the Chinese buyers.

Canadian producer PotashCorp recently talked of possibly moving away from a Chinese contract altogether and this sentiment was mirrored by BPC.

May to December 2008, BPC and Canpotex were understood to have supplied China 2m tonnes of potash under contract.

BPC met with the Indian contract buyers in Delhi this week, but talks are understood to have stalled over price disagreements.

One supplier said initial discussions with Indian buyers indicated that a rollover of the 2008-09 contract price - $625/tonne CFR (cost and freight) including 180 days’ credit – was possible.

However, it is understood that the buyers will not accept this.

“Lots of producers offered additional tonnages at a discount for prompt shipment. [So] naturally, rolling over the same price [as last year] doesn’t make sense,” said one Indian trader.

The Indian buyers are likely to hold out as long as possible for lower prices as MOP is heavily subsidised for Indian farmers.

The Indian fertilizer subsidy spiralled from around $6bn in 2007 to approximately $34-35bn in 2008 and the government is keen to reduce this financial burden. With MOP still priced much higher than other fertilizers, the government is expected to buy less this time round. There are some suggestions it may buy none under contract at all if producers hold firm to their price targets.

“The subsidy is the main factor. The government cannot reconcile the idea that potash is double the price of diammonium phosphate (DAP) or urea,” said an Indian trader.

Currently, Indian farmers pay around $100/tonne for standard MOP.

India imported around 5.6m tonnes of MOP under May 2008- April 2009 contracts.

With contract talks in stalemate, certain producers have tried to play down the importance of these contracts and looked to shift the focus to other markets:

“We had no expectations for India or China and are focussed on the markets that need to buy now. In most Asian markets, potash inventories have been drawn down and with the increase in agricultural commodity prices, we expect strong demand to return in the second half [of 2009],” said a major seller.

Brazil, a major importer of potash, has assumed greater significance in the absence of Chinese and Indian agreements.

“There is no question there is huge pent up demand in Brazil and we expect that Brazil will import 1m tonnes per month starting from July. Discussions on pricing are in progress,” explained one seller.

Producers have placed granular MOP cargoes at $750/tonne CFR in recent months, although question marks remain over how established and representative this price is.

With insecurity pervading the market, global potash trade is likely to remain sluggish until the first of the key contracts is settled.

Potash sellers include North American company Canpotex, Jordan’s Arab Potash Company (APC) and Belarusian Potash Company (BPC).

($1 = €0.72)

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By: Carl Roache
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