North America's largest potash producers are in a standoff with China, refusing to meet demands for lower prices in a key contract because they expect a rebound in the depressed fertilizer market.
Investors in companies such as Mosaic Co., MOS-NPotash Corp. of Saskatchewan POT-T and Agrium Inc. AGU-T have been watching closely for a “floor price” that would be set in a Chinese contract after European producers reached a deal with China at about half the previous price.
“We're not prepared to meet the kind of price expectation the Chinese have,” Jim Prokopanko, chief executive of Plymouth, Minn.-based Mosaic told analysts Wednesday. “We are able to find customers willing to pay higher prices and there's no point in lowering it for the Chinese.”
Vancouver-based Canpotex, an international marketing agency that represents Mosaic, Potash and Agrium, broke off talks with the Chinese last month shortly after the European deal was announced at $350 (U.S.) per tonne. Canpotex's move was unusual because the North American and European groups typically work together on Chinese negotiations, with one group generally following the price set by the other. Mr. Prokopanko said negotiations will resume soon, but Canpotex is convinced the price must be higher.
“Quite simply we don't have a meeting of the minds on what the fundaments are on potash,” Mr. Prokopanko said. “We are seeing other customers show a determination and willingness to commit to product at prices above the China-[European] agreement.”
He added that the Canpotex members believe the potash market is rebounding after being pummelled for more than a year.
Potash prices peaked in 2008 at close to $1,000 a tonne as prices for many agricultural crops hit record highs.
But the market began to tumble last year as farmers cut back on potash purchases.
Profits for all three fertilizer producers have fallen sharply as well.
This week Mosaic reported a second-quarter profit of $107.8-million, down 89 per cent from a year earlier. Revenue fell 43 per cent to $1.71-billion. Potash and Agrium have seen similar profit declines.
But Wednesday Mr. Prokopanko said the fertilizer market is turning.
Prices for many agricultural crops, including corn, soybeans, sugar and palm oil, have climbed sharply in recent weeks, pulling fertilizer prices up as well.
Some potash contracts have been set at as much as $430 per tonne and prices for phosphates, another key plant nutrient, have jumped 35 per cent.
Higher crop prices coupled with comparatively low fertilizer prices should prompt farmers to return to more normal levels of potash purchases, he said.
“We're going forward looking for higher pricing in potash,” he said.
His comments helped lift the company's stock to $65.10, a 52-week high, at one point yesterday on the New York Stock Exchange.
Several analysts share the optimistic sentiment about potash and say that the European contract with China finally established the long-awaited floor for the product and will prompt farmers to start buying again.
“We are now turning bullish on potash exposure,” Lars Kjellberg an analyst at Credit Suisse in New York said in a note this week.
“Our global view has been to stay on the sidelines for the potash names owing to the lack of pricing visibility, poor demand and downside risk to estimates.”
Still, there's no guarantee potash prices will jump any time soon, which could put pressure on the Canpotex group to strike a deal with China.
Charles Neivert, an analyst at investment bank Dahlman Rose & Co. in New York, is cautious about any major rebound in potash, noting that all major international potash contracts will be at lower prices year over year.
Mr. Neivert agreed there will be a rebound in prices and production, but it will not be remarkable.
“When you come from a disaster how can you not rebound?” he asked in an interview Wednesday.
“We're at zero and we're going to come up form zero.”
Global potash production sank to about 30 million tonnes last year, about half the production of 2008. Mosaic expects production to reach nearly 50 million tonnes this year.
“We are just sort of getting back toward a normalization,” Mr. Neivert said.
