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2 Russia reaps rich harvest with
potash By John Helmer
MOSCOW - For the 150 years between the
Opium Wars and the end of World War II, the "China
Discount" was notorious in the Shanghai Bund, on
the bank of the Huangpu River. It represented the
gap between what the little Western traders agreed
to pay for Chinese-made goods, and the best their
Chinese sellers hoped to fetch.
These
days, China's commercial demand has reversed the trading
advantage. Since Chinese
demand represents such a large share of the global
market, especially in minerals and metals, the
China Discount is now the gap between the price
Western sellers offer for their commodities and
what China agrees to pay. Converting the China
Discount into a premium is the dream of all
commodity exporters, but it is a commercial fight
that requires nerves of steel.
A year ago,
potash miners Uralkali (Russia) and Belaruskali
(Belarus), and their trading alliance called the
Belarusian Potash Co (BPC), halted shipments of
potash to China for seven months while the two
sides argued over price. Vladislav Baumgertner,
chief executive of Uralkali, said his strategy was
"price over volume". Cutting the China Discount is
another way of putting it.
A significant
volume of Uralkali's and Belaruskali's production
went unsold during the bargaining period. In the
interval, distributors of potash in China were
forced to run down their inventories to meet the
relentless domestic demand.
When the sides
finally agreed on price, it was raised by up to
US$30 a tonne, and next year, as the gap closes
between what China and the rest of the world pay
for potash, the China Discount will be gone.
Why potash? Potash was first
produced by burning hardwood and refining the
potassium from a soluble solution. Its ancient
uses were in the manufacture of glass, soap and
crop fertilizers, and it is the last of these that
predominates today, supplying one of the key
nutrients for plant and crop growth.
Instead of through burning wood, however,
most of the world's supplies of this industrial
mineral are mined; and the largest mineral
reserves of potash are concentrated in just three
countries - Canada, whose stocks are the largest,
at about half the global aggregate, according to
the US Geological Survey; Russia, with more than a
quarter; and neighboring Belarus, with 9%.
Altogether, the three hold 85% of global reserves.
In terms of production capacity, two
linked Russian companies, Uralkali and Silvinit,
trail just behind Belaruskali, which in turn is
just behind Potash Corp of Canada and another
North American producer, Mosaic. In the global
market, the concentration of potash mining is
greater than that of gold, silver, diamonds,
nickel, copper and bauxite.
The global
trade in potash is even more concentrated, with
just two syndicates dominant: Canpotex managing
sales of the three North American majors, Potash
Corp, Mosaic and Agrium; and BPC, a joint venture
combining Uralkali and Belaruskali.
As
population growth drives demand for foodstuffs,
and the arable land available to supply food
shrinks, it is the mineral fertilizers that
farmers use to cover the gap between consumer
demand for calories and the productivity of
farmland to supply it.
Thus the biggest
consumers of potash are the hungriest - China and
India, followed by Brazil; nature has not endowed
them with the sub-soil resources of potash to meet
their own requirements. But with just two
syndicates in control of trade, and just three
major importers, last year's tussle over price
between Russia and China was fierce.
BPC
sought to bargain supply for a price increase of
$40 per tonne for China, while holding the line
with India. On the other side of the negotiating
table, the Chinese wanted a reduction of $20 per
tonne, and the Indians also sought a price cut.
BPC won the contest. Both the Chinese and Indian
prices have risen - the Chinese price by $25-$30 a
tonne; the Indian price on hold in 2006, and up by
$50 a tonne in 2007.
But the immediate
impact in the first half of 2006 was a cutback in
both output and exports for Uralkali. Then in
October, a flood forced a halt to production at
one of its mine units. The combination reduced
Uralkali's mine output from 5.4 million tonnes in
2005 to 4.2 million tonnes in 2006. The mine
losses have been totaled at about $80 million,
while the combination of factors reduced net sales
from $725 million in 2005 to $613 million in 2006.
Net profit dropped from $333 million to $129
million. Until the bad news struck, Uralkali was
reporting net sales growth of 67% per annum, the
highest in the global industry; and the lowest
cost of sales.
A market source told Asia
Times Online, "There is really no such a thing as
the China Discount [anymore]. It is true that, in
general, Chinese buyers enjoy more favorable
pricing, compared to smaller markets, due to the
magnitude of their purchases. That also makes the
negotiations in China one of the most important
commercial negotiations of any year. Although the
current price in China is lower than in most Asian
markets, it is important to stress that it is
fixed on a free-on-board [FOB] basis.
"So
customers are taking 100% of the freight risks on
their shoulders. One year this policy is favorable
to the buyer; another year it is more favorable to
the sellers, due to the very volatile freight
market in the past five years. One of the possible
ways to try to eliminate possible price deviations
between China and neighboring markets is to change
the basic delivery terms to cost-of-freight
[CFR]."
A recent report on Russian potash
by Alfa Bank analyst Roydel Stewart concluded that
Uralkali's marketing tactics with China last year
produced "confirmation that BPC can operate as an
effective leader in the potash industry. We expect
a return to strong sales demand in 2007, as
distributors in China had built large stocks of
potash in 2005 that have since become mostly
depleted ... Swing producers now monitor global
sales to avoid large inventory buildups."
If Uralkali and BPC have become the
muscular arm of the potash trade, China, and the
larger Asian market, remain the consuming stomach.
China buys roughly one-third of Uralkali's annual
output; India another 14%; and the countries of
Southeast Asia 13%. Altogether, the Asian market
accounts for about two-thirds of Uralkali's sales.
Blame it on biofuel Two demand
drivers lift the potash price in Asia. Food is
one; fuel, that is to say biofuel, is the other.
As an agricultural fertilizer, the
fundamentals for potash are unique. Nitrogen and
phosphate are the other essential ingredients for
plant growth, but both are produced from natural
gas; they are abundant in supply; and because they
depend on rising gas prices, profit margins for
producers are being squeezed. Biofuel comes in
two types - bio-ethanol, refined mostly from crops
of sugarcane and maize; and bio-diesel, from
vegetable oils distilled from palm, soybeans and
rapeseed.
To offset the cost of filling
the world's fuel pumps with $70 crude oil, the
European Union has already legislated to oblige
oil companies to blend into every barrel of
fossil-based fuel a
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