Wednesday, 2 January 2013

Canpotex Signs a Potash Contract with China

Canpotex recently agreed to sell 1 million tonnes of potash to China for $400 per tonne, significantly lower than the most recent deal, which set the price at $470.  At first glance, the move appears surprising.  After all, Canpotex maintains a religious policy of curtailing supply in periods of soft demand, which usually prevents prices from falling abruptly.  And the marketing body, which sells on behalf of Potash Corp, Mosaic and Agrium, has cut production significantly in recent months.  What's more, potash consumption in 2012 was as high - or nearly so - as it's ever been.  However, robust end-market use has not translated into mine production on a one-for-one basis over the past year, as many farmers and distributors have drawn down inventories, rather than purchasing additional product.
Though the price is lower, the deal will have some advantages for producers, both in the near-term, and over the long-term.  For one, it gets a significant amount of product moving.  In addition, it may prompt India to re-enter the market, which has been very difficult of late, largely due to domestic political forces.  Given that potash mining has significant fixed costs, there is also some merit in having a decent base load of product being sold.  Finally, it may also tighten up spot markets later in the year, which accounts for most of Canpotex's sales.
Still, all of these factors likely do not outweigh the price cut.  So what happened?  It's possible that Canpotex simply got outmaneuvered, or that the current supply/demand balance is tipped too far in favor of buyers.  But Canpotex may have forfeited a battle in order to win the war.  The most serious long-term threat to potash producers is the risk of oversupply.  Over the next year, BHP Billiton will decide whether to go forward with its potentially massive Jansen mine.  The project is expected to be very expensive, and cannot be justified unless potash prices are far higher than the present $400 per tonne.  To be sure, what matters most is where potash prices are seven or more years down the road, but it’s difficult to allocate $5 billion - and perhaps much more, in this case - without seeing prices rise and stay up for a period of time.  Only time will tell, but the reduced price may be enough to scare off new production, at least for a few more years.

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