Analysis

India has enough potash to keep Canpotex waiting

MUMBAI/WINNIPEG — Reuters

Canpotex Ltd. makes export sales to India and elsewhere on behalf of leading North American potash producers Potash Corp. of Saskatchewan, Mosaic Co. and Agrium Inc. (© David Stobbe/Reuters)

India has enough potash in reserve to delay its purchases of the key crop nutrient well into the second quarter of this year, putting new pressures on North America’s big fertilizer producers at a time of high inventories and stiff competition.

Indian sources say the country, one of the world’s top potash importers, has stocks to last farmers into late spring, pushing out the likely date when they would need to buy more from Canpotex Ltd., which makes export sales on behalf of leading North American producers Potash Corp. of Saskatchewan, Mosaic Co. and Agrium Inc.

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That would be bad news for the fertilizer giants, whose profits have suffered. Their analysts still expect an Indian deal by March. Potash Corp., the world’s biggest producer by capacity, has idled four of its mines in recent months, and would likely have to extend the cutbacks if India is absent much longer.

India and China have long bought potash through contracts, rather than on the spot market from the big producers, and usually at market-low prices. China signed its most recent deal in December, ending a long holdout, and India last inked a contract in August 2011.

The Chinese contract gives Indian buyers a clear idea of the terms they can negotiate, and any talk of delay may partly be a negotiating ploy, said Mark Gulley, an analyst for BGC Financial LP in New York.

Yet Indian sources noted that India, which uses potash to boost yields of crops like wheat, cotton and rice, had about one million tonnes stockpiled as of December, more than enough to take farmers through the winter growing season.

“So far, we have not started talking to global potash suppliers,” said a source at Indian Potash Ltd., an unlisted company that negotiates on behalf of all Indian buyers, such as the Indian Farmers Fertilizer Cooperative, Coromandel International and Tata Chemicals.

“India has sufficient stocks for the present season and new requirements will come up only in June.”

Importers may also want to wait for India to set its potash subsidy levels, likely in March, said Tarun Surana, an analyst at Sunidhi Securities and Finance in Mumbai.

Indian potash stockpiles are unusually large, due to high prices and a weak monsoon season that curbed demand.

With little agricultural activity from March to May, India could wait until May to sign new supply contracts ahead of the June start to the kharif summer season.

“Somewhere around middle of May, we might see contracts getting signed and the shipments would start coming in June, when the kharif season starts,” said Naveen Kapoor, president of agriculture business at Zuari Global Ltd.

India’s next contract with Canpotex Ltd., which is one of the world’s largest potash sellers, will be closely watched by Belarusian Potash Co., which wants a supply deal for its member companies Uralkali OAO and Belaruskali.

Germany’s K+S AG, Israel Chemicals Ltd. and Arab Potash Co. PLC also sell potash to India, while buyers like Brazil pay a premium on the spot market over the Chinese and Indian contracts.

India and China have already kept Canpotex waiting about five months longer than most expected. Agrium spokesman Richard Downey said despite what Indian sources may say, the company expects a deal in the first quarter.

On Dec. 31, Canpotex announced a six-month deal to sell one million tonnes of potash to China’s Sinofert Holdings Ltd. at a steep 15-per-cent discount to the last contract – the new price is believed to be $400 per tonne. India usually pays around $20 a tonne over China’s price to reflect the longer distance to its ports.

“China cut their deal when their inventory was more than adequate, and my sense is Canpotex decided they just needed to get something done,” Mr. Gulley said. “The only thing to argue about is the premium (India) will pay.”

With China and India on the sidelines, North America’s potash stocks swelled in December to 37 per cent above the previous five-year average, making it all the more important for producers to cut deals.

North American analysts following the industry doubt the idea of further delay to a contract with Indian buyers.

In a Reuters poll of eight analysts, six expect a deal between Canpotex and India before the end of February. The other two expect a contract in early March.

Predicting when India will sign a deal is challenging, since talks are tied to politics and government subsidies, said Robert Winslow, an analyst at National Bank Financial in Toronto.

If India plans to hold off, it may be counting on big corn and soybean harvests in South America, which could weaken grain prices, and by extension, fertilizer values, Mr. Winslow said.

“Where that could backfire is if something goes wrong with the South American crop, or we continue to get extreme drought in the U.S. Midwest, and grain prices stay elevated longer, then the Indians could be under the gun.”

The average price estimate in the Reuters poll is $416 per tonne, with estimates between $400 and $420 – the latter being the estimate from five out of eight analysts.

Flagging exports pressured Potash Corp. and Agrium in the third quarter, when profits fell 22 and 56 per cent respectively. But the shares of the two companies are up since the Dec. 31 Chinese deal. Potash and Agrium report full-year and fourth-quarter results on Jan. 31 and Feb. 22 respectively, with analysts forecasting lower quarterly earnings.

“Part of the investment thesis for the Canpotex producers is that shipments will rebound in ’13,” Mr. Gulley said. “But the problem is that there’s plenty of product around.”

India, which relies on imports for all of its potash needs, bought five million tonnes in 2011, making it the fourth largest importer of the nutrient that year, according to data from the International Fertilizer Industry Association.

Canpotex, Mosaic and Potash Corp. declined to comment on negotiations.

“We believe the issue is one of timing,” Mosaic CEO Jim Prokopanko said on Jan. 4. “India cannot continue to sacrifice food security and its environment by continuing its market-distorting subsidies, which lead to imbalances in crop nutrition.”

Looking further ahead, India is seeking to ease its dependence on the big potash companies.

India’s Gujarat State Fertilizers & Chemicals Ltd. bought a 20-per-cent stake and agreed to a future potash off-take deal with Canadian mining company Karnalyte Resources last week, India’s first foray into Canadian production.

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