The inability of potash suppliers to secure a deal with China is spurring concern their No. 1 consumer will rely on the spot market, driving down prices.
Potash companies typically reach a deal with Chinese buyers in February, setting a benchmark price that guarantees stable profits for the nutrient used by farmers around the world to grow healthy crops. Now, with no pact in hand by mid-March, producers face the prospect of having to compete on pricing in an oversupplied market, said Daryna Kovalska, an analyst for Macquarie Group Ltd. in London.
The Chinese benchmark price has underpinned the potash industry for more than a decade. This year, though, China went into the talks emboldened by higher inventories at home and falling prices on the spot market. The country wants to pay at or below the $305 a metric ton it paid last year, according to Macquarie, while producers want a 10 percent increase.
Without an agreement, “there is a chance that the system will collapse,” Kovalska said in a telephone interview. In that case, the earnings certainty seen by producers in years past “will go out the window.”
Potash is a form of potassium used as a fertilizer to strengthen plant roots and boost drought resistance. Unlike most other commodities, it’s dominated by producers that work to coordinate sales.
The three biggest North American suppliers -- Mosaic Co. of the U.S. and Canada’s Potash Corp. of Saskatchewan and Agrium Inc. -- have a joint venture controlling their exports. The Russian producer PAO Uralkali, the world’s biggest supplier, had a similar export arrangement with its counterpart in Belarus until 2013.
The Uralkali-Belarus joint venture once controlled 40 percent of potash exports. When Uralkali unexpectedly terminated the relationship in 2013, prices plunged.
The China contract price has been unchanged at $305 a ton since January 2014. During the past year, the average U.S. retail potash price has risen 0.8 percent to $518.04, according to DTN, a commodity news service.
Oleg Petrov, Uralkali’s head of sales, said the current talks have been held up because of large inventories of potash held by China. Agrium and Mosaic spokesmen referred requests for comment on potash pricing to Canpotex Ltd., the export venture controlled by the big three North American producers.
“Asian fertilizer markets have always been and will continue to be intensely competitive,” Canpotex Chief Executive Officer Steve Dechka said in an e-mailed statement.
Officials from Uralkali and Potash Corp. declined to comment. No one at Sinofert Holdings Ltd., a Chinese company that represents the country in contract talks, could be reached for comment.
Even if negotiations in China end up being successful this year, “we don’t see the suppliers achieving the price they are looking for,” Kovalska said, though there’s plenty of uncertainty. Credit Suisse Group AG said Tuesday that China will agree to a higher price.
“Nobody really knows,” Spencer Churchill, a senior analyst at Paradigm Capital Inc. in Toronto said by phone. “The Russians are unpredictable, the Belarusians are unpredictable and so are the Chinese.”
The delay is “one more step toward dissolving the traditional patterns” in the potash market, said Jason Miner, an analyst at Bloomberg Intelligence. Contract terms have grown shorter in recent years, and now it’s becoming harder to predict when deals will be signed, he said.
India, another significant potash buyer, may sign a supply contract before China for the first time since 2008, according to Miner. The strong U.S. dollar, combined with government subsidies for fertilizer imports in India, could lead to a low contract price.
“The last time India came first, we faced seven quarters of falling volumes and then sharp price declines,” Miner said.
The shifts in potash echo transitions seen in other commodity markets, notably iron ore, Kovalska and fellow Macquarie analyst Colin Hamilton said in a March 9 report.
Like potash, iron ore was once dominated by a handful of producers and sold primarily through fixed-price contracts. Today, iron ore prices are tracked daily, and that information is typically used to negotiate long-term sales agreements.
“The natural psychology is for pricing to move to a spot- linked index basis -– something we have seen in other bulk commodities,” the Macquarie analysts said in the report.