Contract negotiations with China are close to a se - Contract negotiations with China are close to a settlement: Canpotex expects to have a new potash contract for China settled by as early as month-end. If a contract is reached sooner than later this would be considered bullish, especially if the price for potash remains flat at US$470/tonne.
- Strong demand for potash on the horizon: Canpotex projects that 2012 sales of potash should be in-line with the strong sales witnessed in 2011 (~9.8 mm tonnes) with demand recovering in the second quarter. Demand for the crop nutrient potash is seen recovering in the second quarter.
- Momentum behind stock prices during previous contract settlement periods: In 2011, there were 2 occasions where Canpotex negotiated price and volume contracts with China. In late January 2011, we witnessed stronger price movements after the contract was settled (~21 Jan-11), when Canpotex negotiated a $400/t for 600k tonne shipment over 6 months. In late June 2011, we witnessed stronger pricing momentum both before and after Canpotex negotiated a $470/t for 630k tonne shipment terms (POT and MOS rallied ~10%, AGU 5%). The tonnage during this period was light due to low inventory levels.
- Conclusion – potentially bullish near-term outlook? If China is close to a new contract with Canpotex, we view this as positive on several fronts. 1) This implies China anticipates very strong potash demand; 2) an earlier contract implies the likelihood of flat pricing (~US$470/t) for China at least; 3) this would also imply demand returning earlier than anticipated; 4) lastly, new potash contracts by China or India usually provide share price momentum for the major potash suppliers, which we would expect to continue.
Over the past two decades, Potash prices have been steadily rising. In recent years, rising demand coupled with mine depletion has resulted in strain on global supply of Potash. Fertecon Ltd.* forecasts demand will outstrip supply into the foreseeable future, contributing to long term price of potash to remain robust. After years of relative stability, potash prices have more than doubled since 2004. There have been dramatic price spikes recently, as evidenced in 2006 with 23% increase in China, 50% in Malaysia and 55% in Brazil – three of the world's dominant potash consumers. In April 2008 China's Sinofert Holdings Ltd. reached an agreement to pay $400USD per metric ton (MT) higher than in 2007 raising the price to $576USD per MT for fertilizer delivered to Vancouver, British Columbia. Potash for delivery to Southeast Asia in 2009 has remained at more than $900.00 MT since hitting record levels in July 2008.
* Formed in 1978, Fertecon Ltd. is an independent group of professionals dedicated to serving the world fertilizer and related industries