Canada's potash cartel has blinked in negotiations with one of its biggest buyers, making a significant cut to the price of its fertilizer ingredient, after China ended its so-called potash holiday.
Canpotex Ltd. has struck a deal to sell one million tonnes of potash to China's Sinofert Holdings Ltd., but at a much lower price than last March. Canpotex, the offshore marketing company controlled by Potash Corp. of Saskatchewan Inc., Agrium Inc., and Mosaic Co., said on Monday that the new contract's per-tonne price is $70 (U.S.) less than its last Chinese deal, reached in March. One analyst believes this is a 15-per-cent drop.
The deal ended a negotiating stalemate, when China and India took a "potash holiday" – sitting on the sidelines in part because of high prices. Canpotex's owners enjoyed high prices for potash prior to 2012, and this may have hurt them in the last round of talks. Negotiations with India are still under way.
"The drop in price was significant but we have to get the volume back in global demand," Rick McLellan, a senior vice-president at Mosaic, said in an interview. "The volume clearly offsets the price in this case.
"The Chinese are very good negotiators and always have been," he said. "And they are very good customers."
Demand for crop nutrients such has potash has soared in Asia as its population and middle class grows. With more money in their pockets, people are demanding more and different types of food. Cattle, for example, require certain grains for feed, thus changing the makeup of Asia's crop production.
Mr. McLellan said China's potash consumption is not diminishing, but that farmers in India "significantly" pulled away from buying the fertilizer because of high prices. He expects Canpotex and India to strike a deal in the first quarter.
Mosaic sees the deal with China as a "very positive New Year's Eve gift," Mr. McLellan said, although others view it as weakness in Canpotex.
"The oligopoly has been losing strength," Robert Winslow, an analyst at National Bank, said in an interview. "A lot of what has happened here is demand destruction – that the oligopolists got a little bit too aggressive with their pricing, and the price for potash got a little bit too high, and it hurt demand."
Bill Johnson, a spokesman for Potash Corp., would not address why Canpotex's grip over fertilizer prices is weakening.
"This reflects where the current market is at," he said.
Potash Corp., the world's biggest producer of the mineral, and Agrium have suffered financially in recent quarters as their largest customers waited for better prices. Potash Corp.'s profit dropped 22 per cent last quarter while Agrium's earnings slipped 56 per cent. Agrium has warned the fourth quarter will also take a dent and Potash said it could miss its profit forecast for the year.
While Canpotex lost pricing power in its latest Sinofert deal, the analyst Mr. Winslow notes the volume increased and the market now has clarity. He believes the new deal is worth about $400 a tonne.
Canpotex does not reveal the price it strikes on its contracts – just the difference between previous deals. Its last deal with Sinofert was in March, when it reached an agreement to deliver half a million tonnes of potash, with an option for another 200,000 tonnes, in the second quarter. The price was unchanged from the six-month agreement it had with Sinofert in the second half of 2011.
Canpotex competes with Belarusian Potash Co., which sells potash on behalf of Uralkali and Belaruskali.