Potash deal clouded by price secrecy

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Canada's fertilizer producers hailed a breakthrough agreement to sell potash to China, but the companies' secrecy about the price they obtained left investors worried about the terms of the deal.

Between now and the end of March, Potash Corp. of Saskatchewan Inc., the Mosaic Company and Agrium Inc. will together ship 350,000 tonnes of potash to Chinese fertilizer buyer Sinofert, said Canpotex, the overseas sales arm for the three companies.

The deal ends a year-long stretch without a single shipment from the group to the Asian country. It comes after the two sides broke off negotiations in December, as Canpotex pushed for better pricing than the annual contract signed last fall by Belarusian Potash Co. at $350 (U.S.) per tonne. Many now believe that deal set the floor price on potash, a key fertilizer ingredient that soared to nearly $1,000 a tonne in 2008. Potash prices have risen in recent weeks to as high as $430.

But Canpotex declined to reveal the sale price it negotiated, leaving investors concerned the deal may not be substantially better than the Belarusian Potash (BPC) deal. Canpotex said only that it was done "at competitive prices," and that it had agreed with Sinofert to reveal no more. That broke a long-standing tradition that has seen the China deal used as a bellwether. Canpotex has provided pricing information on Chinese sales since at least 2001.

Discouraged by the lack of pricing disclosure by Canpotex, investors trimmed share prices for all three Canpotex members.

The China deal could be "a number they don't want in the marketplace because it's not a great number," said Sadiq Adatia, chief investment officer of Toronto-based Russell Investments. But, said Mr. Adatia, "it may just be that they agreed to a good deal that's beneficial, but China agreed to say let's keep this quiet so it doesn't get out in the marketplace."

"It's too early to read into it or find out what's going on," he said.

Spokesmen for all three companies refused to discuss whether the price was different from the $350 BPC deal. Last week, BPC raised its price on Brazil and Asian sales to $410, while Mosaic has signed contracts at $430.

Analysts, however, were skeptical, arguing that potash producers have more to gain by releasing a high price, which would set a new benchmark. A low price could indicate weakness in the potash recovery.

This was also the first Canpotex deal in recent memory to sell potash on a short-term basis. Past sales have been worked around annual contracts, but China refused to accept any deal last year after the steep run in potash prices in 2008.

This year it agreed to a quarterly spot price contract, which Agrium chief executive officer Mike Wilson called a step forward.

"They haven't been honouring long-term deals, so why not go spot?" he said. "It's a good deal for us. Good deal for them, I assume. They need the product. ... We didn't really need to have a deal with them. It's good to see that they need our product."

It could be a dangerous gambit, especially if it gives China further leverage over prices, TD Securities analyst Paul D'Amico wrote in a research report.

"If China is a spot buyer, we speculate there is potential that the consolidated selling power of major producers is somewhat diluted as there would be an implied increased selling competition at any one point in time through the year for China's business," he wrote.

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What is Canpotex?

Canpotex is the world's largest exporter of potash, an international marketing and distribution company wholly owned by the Saskatchewan potash producers: Agrium Inc., Mosaic Company, and Potash Corp. of Saskatchewan Inc.

Agrium supplies Canpotex with 9.28 per cent of its potash product, Mosaic 37.1 per cent, and Potash Corp. 53.6 per cent.

As a competitive world supplier, Canpotex markets Saskatchewan potash principally to countries in Asia, Latin America, and Oceania. Operating since 1972, Canpotex has corporate offices in Singapore, Hong Kong, Tokyo, Saskatoon and Vancouver.

Canpotex's potash sales are currently in the range of nine million to 10 million tonnes a year. Major international markets include Australia, Brazil, China, India, Indonesia, Japan, South Korea and Malaysia.

Source: Canpotex