MOSCOW - The magnitude and growth rate
of demand from China still drives global
commodity prices. But in the fertilizer sector,
where China this month has had to agree to a price
for potash more than double what it paid last
year, the inflexibility of Chinese demand for food
has made it difficult for the country's
negotiators to hang on to the commercial
advantages they are accustomed to enjoying from
being the world's largest consumer.
Last
year, Chinese buyers of potash lost their
traditional discount; that is, the lower price
Chinese importers would pay compared with other
buyers in the Asian, Latin American, and European
markets on account of the larger volumes they
contract for
Recently, the Chinese agreed to pay a premium
for their supplies, and they will receive less
than they had bargained for.
Chinese
buyers also face the shortening of contract terms,
canceling their last commercial advantage in the
potash market - annual contracts, with prices
fixed from one springtime contract agreement to
the next.
In an announcement on April 17,
it was revealed that Chinese importers of potash
have agreed on a price of about US$650 per tonne,
delivered from Russia by sea. This is higher than
the Indian benchmark price of $625 agreed just
weeks ago. It is $400 per tonne above the price of
the expiring Chinese contract, signed a year ago.
The term of the new pricing deal is just eight
months. The volume of deliveries for this period
will be just 1 million tonnes, half of the 2007
contract volume oiver a 12-month period.
At a meeting with industry analysts last
week in Moscow, Oleg Petrov, deputy director for
Belarusian Potash Company (BPC), the dominant
global trader for potash, warned that it is
preparing to switch to spot-price contracts,
providing for deliveries over no more than six
months. That, according to BPC, is bound to put
further upward pressure on the negotiations with
Chinese importers starting shortly.
Potash, as the name indicates, was first
produced by burning hardwood, and refining the
chemical element potassium from a soluble
solution. Its ancient uses were in the manufacture
of glass, soap, and crop fertilizers. It is the
last of these that predominates today, supplying
one of the key nutrients for plant and crop
growth.
Instead of 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 neighbouring Belarus, with 9%;
altogether, these three countries 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 Corporation 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.
Today's hyper market moves potash's price
faster than gold, with an impact on rice, corn and
other foodstuff prices that is becoming
uncomfortably obvious in Asia. Corn hit an
all-time US record $6.43 per bushel this week.
Rice is at $22.17 per hundredweight, and still
climbing. Merchant hoarding, consumer rioting,
export bans, and price controls are reactions that
are spreading from Asia to Africa.
The
global trade in potash is even more concentrated
than OPEC for oil, with just two syndicates
dominant: Sinagpore-based Canpotex, which manages
sales of the three North American majors (Potash
Corporation, Mosaic, and Agrium), and Minsk-based
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 farmers use that help cover
the gap between consumer demand for calories and
the productivity of farm land to supply it. Thus,
the biggest consumers of potash are the hungriest
- China and India, followed by Brazil. Nature has
not endowed these countries 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,
the global feast of foodstuffs is driving potash
demand far faster than the miners can produce it.
The result is that the benchmark commodity
price being set by BPC, the swing producer in the
world, is driving up the share prices of the
mining companies that deliver the fertilizer to
the market.
Vladislav Baumgertner, chief
executive of Uralkali, told a producers’
conference in Canada early this month that he
believes the spot price for potash is likely to go
over the $800 level (calculated per tonne of
potassium chloride with freight and insurance) in
the fourth quarter of this year.
A table
in his presentation shows the price dynamics for
potash from minehead to consumer since January 1.
Roughly 40% of Uralkali’s potash is sold by BPC on
12-month term contracts renegotiated once a year,
typically in the spring for the Indians, followed
by the Chinese.
The BPC benchmark is fixed
by the contracts signed with one or a few large
fertilizer distributors in these main markets. In
India, BPC has one client, Indian Potash Ltd
(IPL). In Brazil, there are two to three; in
China, several. Analysts say the roughly 10 of the
BPC’s largest buyers account for more than half of
its sales around the world.
According to
Baumgertner, at the start of this year the
contract price for India was $270. In March, BPC
and IPL agreed that, starting in May, and running
until May 2009, the new price will be $625. This
was an increase of 132% year on year.
On
April 1, the BPC's Petrov said he would use the
Indian price as the benchmark for the Chinese
negotiations; the China term-contract price
negotiated last year, and running through this
spring, was $250. For potash delivered by Uralkali
by rail or sea to northeastern China, the January
price was $370. Brazil, the third of the main
markets for Uralkali, was paying $450 in January.
It is under pressure to accept the rising
benchmark. BPC officials say they expect the spot
price to reach $700 by July, and $800 by November.
This week in Moscow, Petrov claimed that a
price of $1,000 per tonne was approaching "rather
fast". He intended Chinese potash buyers to
understand that they may have to outbid the
Indians with a premium. If they don't, the potash
will sail elsewhere.
The outcome of BPC's
negotiations is now clear: China is obliged to
outbid the rest of Asia to get its potash, and
much of its former supply is going to even higher
price-bidding destinations.
Baumgertner
explains that the dynamics of global demand and
buying power this year are changing the
geographical direction of Uralkali's sales and
shipments. China represented a 40% share of sales
in 2007; it will drop to 23% this year. India is
up from 7% to 12%; Southeast Asia up from 11% to
17%; Europe up from 8% to 12%, and the US, at zero
for Uralkali last year, will be 4% this year.
Brazil remains constant at 21%.
When the
boats can change their ports of call, as a Moscow
brokerage analyst notes, China’s traditional
buying and bargaining power dwindles. "The Chinese
market is very important for Uralkali, but the
fact that Uralkali can reallocate products to
other markets in the current environment increases
the chance that the new pricing level for China
will be much higher than we expect."
When
BPC’s volume of shipments are counted with direct
shipments to China by Uralkali Trading, the
combination of Uralkali and Belaruskali today
account for 33% of exports worldwide. Silvinit,
Russia’s second potash producer, trading on its
own, takes a 12% market share, giving the Russians
altogether a 45% grip on the market. The rival
North American trader, Canpotex, based in
Singapore, is down to 26%, and Germany’s K+S Group
is at 14%.
The market is moving so fast,
the investment bankers and brokers, who feed off
share prices, are having trouble feeding their
revenue and profit models. On Monday, UBS issued a
price upgrade for its potash forecast for 2008 to
$611; for 2009 to $850. By Thursday, these numbers
are looking obsolete.
MDM Bank in Moscow
issued an advisory to mining market investors last
week to "highlight the operating leverage expected
from these increases that could lead to further
increases in earnings estimates for Uralkali. The
stock has now reached another all time peak level,
driven partly by anticipation of a positive
outcome from these negotiations. On one hand, we
view the valuation as extremely rich at this
point, but on the other we recognize the stock’s
strong momentum as this is one of the few plays in
the Russian universe on global food inflation."
The relationship between the potash
reference price and Uralkali's share price is
plain. In 2006, Uralkali’s share price ranged
between $2 and $2.50, with a market capitalization
of about $3 billion. In October 2007, when it was
listed on the London Stock Exchange for the first
time, the share price was $3.35; market cap about
$5 billion. Last Friday, Uralkali’s share price
was $9.25, market cap $19.7 billion. On Wednesday,
it had climbed to $11, market cap $23.4 billion.
In a year, the company has increased its value
more than fourfold. Compared with the big
Canadians, it has still plenty of upside value to
catch up: Potash Corporation is currently
capitalized at $58 billion; Mosaic at $57 billion.
With growth dynamics that look better than
gold, the potash leaders are publicly asking
whether potash can remain the only commodity that
is bound to keep rising in value. At the Canadian
conference, William Doyle, the chief executive of
Potash Corp, the North American leader, said that
he can see no let-up.
"You are going to
get higher yields through using GMO [genetically
modified] seed. You are going to get higher yields
through crop protection chemicals, and higher
yields through our nutrients."
Potash Corp
reported $4.8 billion in aggregate fertilizer
sales in 2007. It produces nitrogen, phosphate,
and potash fertilizers; potash sales by Potash
Corp last year amounted to $1.6 billion, 33% of
the aggregate. By comparison, Uralkali is a pure
potash producer, with $886 million in reported
sales in 2007.
The North Americans and
Russians noted at the Canadian convention that
food inflation, grain shortages, and the rise in
fertilizer prices are triggering government
controls. "I wouldn’t want to see commodity prices
go up a lot more," said Michael Wilson, chief
executive of Agrium, the third-ranked North
American potash producer. "We are starting to get
a lot of government interference in the
agriculture business, looking at export taxes and
caps on nutrient prices." Agrium, a multi-mineral
producer, reported aggregate sales last year of
$5.3 billion, of which just 6%, $316 million was
accounted for by potash.
The Russian
government has introduced export duties for
fertilizers, and such chemical ingredients as
sulphur. Quotas on export volumes have been
threatened. Domestic price growth controls are
also being negotiated with the main producers and
suppliers. Last week, it was rumored that the
Chinese government will shortly impose draconian
export taxes of up to 135% on urea and phosphate
fertilizers; the country does not produce any
potash fertilizers.
Moscow industry
analysts calculate that in cashflow terms,
Uralkali will more than offset the cost of the new
taxes by increasing both volume of exports and
price. Uralkali announced last week that in the
first quarter to March 31, the company produced
1.25 million tonnes of potassium chloride; this
was up 5.6% year on year.
In the month of
March, production growth at the minehead was even
faster at 8%. The data have lit a fire under the
share price - it is up 20% on the week.
John
Helmer has been a Moscow-based
correspondent since 1989, specializing in the
coverage of Russian business.
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