Canpotex Ltd., the offshore marketing company for Saskatchewan potash producers, announced July 23 that it has concluded contracts for the period of July 2009 through March 2010 with its private and public sector partners in India for volumes totaling approximately 850,000 mt, plus an option, at a delivered price of $460/mt. This represents a $165/mt drop from last year’s business.
Russian company IPC-Silvinit broke the potash price logjam a few weeks ago (GM July 13, July 20), and this week saw other major international suppliers jumping on board. Others reported to have signed on this week are Israel’s ICL Fertilizer and Germany’s K+S Group.
Ironically, both The Mosaic Co. and PotashCorp, the two largest members of Canpotex, released earnings last week and opened the door to questions on the Canpotex deal.
The Mosaic Co. President and CEO James Prokopanko told analysts that the Canpotex deal includes an option to go upwards about 20 percent to 1 million mt. He said that last year Canpotex shipped 1.2-1.25 million mt to India; however, that was during a longer span, with that contract concluded in April, instead of July.
Asked when China would buy potash, Prokopanko said the India deal should be a motivating factor as they now have more evidence of what the global price of potash is. “I suppose in the extreme, China might not buy this year and might struggle to get to the end of the calendar year and start negotiating for next.” He said if they don’t buy now, they will have to buy more next year. However, he thinks that from the next couple of weeks to the next couple of months, China will be back in the potash market.
As for the $460/mt, Prokopanko said potash remains a very good business even at these prices.
PotashCorp President and CEO William Doyle agreed, telling analysts that if the current market is as bad as it gets, it is pretty darn good.
“We had higher expectations, but we do not dwell on things we can’t control,” said Doyle. “The settlement price equates to a net back on potash that is nearly triple our average offshore realized price just three years ago. In fact, we expect Canpotex to achieve averaged realized prices in 2009 that are at or near the all-time record price level achieved last year in 2008. Those prices are more than double the previous record Canpotex price year going back 35 years to 1974.”
Doyle said in the short term, the contract breaks the impasse and opens the door to a return of demand around the world. “Buyers now have the clarity they need to resume purchasing. More importantly, the deferrals over the past year have created a massive void in the potash supply chain that needs to be filled in the months and years ahead. This situation is similar to 2006 when major offshore markets delayed signing contracts until the second half of the year. A surge in potash volumes and prices followed, lifting us to record performance in 2007 and again in 2008.”
Doyle noted that potash use in the U.S. in 2008-09 was the lowest in over 40 years. He said at $3.50 per bushel corn and current input prices, farmers can still get a return over variable cost at $300 per acre, about 40 percent above the 10-year average.
Doyle said global potash shipments next year could range between 55-60 million mt. He believes China will have a very big year in 2010, needing to significantly replenish stocks. He puts their current inventories at 3.5-3.7 million mt and said their own consumption has been almost nonexistent, with their farmers having the same fears as those in North America.
Doyle expects the Chinese to come back into the market toward the end of the third quarter and he does not expect them to get a better price than $460/mt CFR. “In terms of their holding out for lower pricing, the Chinese clearly recognize that $460/mt is it. That’s the bottom of the barrel. And the world is moving on without China.”
Doyle said this is the low point. He said the need to replenish stocks is going to put a lot of pressure on pricing as we go forward. “And you’ll see higher prices in 2010. We think 2010, ’11, and ’12, you’re going to see some terrific years ahead of us.”
Doyle said the India contract would cause potash prices to be recalibrated across the world. He expects Korea, Japan, and Taiwan, which all negotiated prices at around $700/mt CFR before the Indian deal, to get a price adjustment downward. Expectations are also that Brazil, which Doyle says may take 5.5 million mt of potash this year, will see lower prices.
As for current global capacity, Dr. Michael Rahm, Mosaic vice president of market analysis and strategic planning, estimated that the potash industry is running at 40-50 percent and phosphates at over 70 percent. Mosaic curtailed about 1.8 million mt in potash over the year and is moving up to run about a little over half of capacity right now. For phosphates, it ran at little over 60 percent for the year and for the exception of its Louisiana plant, which is down for a normal turnaround, is running almost at full capacity.
Doyle said PotashCorp first half potash capacity utilization is at 27 percent, phosphate at 52 percent and nitrogen at 90 percent.