By John Helmer in Moscow
In the global marketplace for potash — one of the vital nutrients for plant growth, food production, and fertilizer fortune — noone is sharper at spotting a bargain than China. That’s because Chinese farmers, and the state fertilizer distributors, comprise the world’s largest consumers and importers of potash. And more than that, when the Chinese fix their annual contract price for potash imports, they set the marker for counterparts in India, southeast Asia, and Brazil, the next biggest potash markets, to follow.
During the last few years, China’s demand has been supplied by several sources , including Canpotex of North America, representing Canadian and US mining companies such as Potash Corporation; the Belarusian Potash Corporation (BPC), representing potash mined in Belarus and Russia; and Israel Chemicals Ltd. (ICL). During the past four years of farm potash supply hunger, and commodity price boom, the China market grew steadily, and so did potash prices.
But that’s history now. In the last half of 2008, the crash of all commodity prices and the shortage of farm credit have led most producers of potash to curtail their production dramatically, and prevent the accumulation of unsold stocks. In the first quarter of 2009, the Russian producer Uralkali, for example, cut its production of potash from 1.3 million tonnes to 459,000 tonnes, a reduction of 63%. Potash Corporation, the world’s largest potash producer in Saskatchewan, has reported that in the same period it cut sales volumes to North American customers by 86%, and to the rest of the world by 78%.
But it’s spring in China; and after an unusually rainless winter, farmers preparing to plant must have more potash than usual to improve their yields out of the dry ground. This is also the time that China’s big-volume buyers usually meet with the major producers and suppliers to fix the volume of deliveries of imported potash for another six to twelve months. But if the China National Agricultural Means of Production Corporation (CNAMPGC), the China National Chemical Construction Company (CNCCC), and Sinopec — the three major Chinese import buyers – keep their pens in their pockets, and their contract orders off the table, what exactly is happening?
The answer is that a relatively big German company, with a relatively small share of the Chinese market for imported potash, is making a quiet play, with an offer on the table the Chinese cannot resist. That company is K + S Aktiengesellschaft of Kassel, Germany. K stands for kali (potash, potassium) and S stands for salz (salt). Five years old in the present corporate structure, K + S is Europe’s largest producer of salt; its well-known package trademark is Morton’s little girl shielded by an umbrella, losing her salt, with the slogan: “When it rains, it pours”. This was a US-owned trademark for almost a century, until Dow Chemical sold it, along with its food and industrial salt products, to K + S for $1.7 billion; Morton’s little girl became K + S’s on April 2 of this year.
But a much bigger wind blowing the umbrella for K + S has been potash demand. During the commodity boom, salt worth €619 million in 2008, up 14% on 2007, lost proportional value in the group’s total revenues of €4.9 billion. This is because the growth of potash prices drove the K + S group’s potash and magnesium division to €2.4 billion, up 70% for the year. K + S says it lifted 8 million tonnes of potash and magnesium last year from six German mines; it counts itself the fourth largest potash producer in the world, with an export market share of one tonne traded in seven.
The latest Chinese import statistics for potash in the quarter to March 31 reveal that China imported more than 170,000 tonnes of German-origin potash; that is more than a threefold increase, compared to the same period of 2008, and almost as much as was imported from Germany during the entire year of 2008.
Asked by Asia Times to confirm that the Chinese customs data indicate that this German potash came from K + S, the company declined to say. The company is also unwilling to acknowledge that the price at which these shipments from Germany have been delivered to China is less than $570 per tonne CFR (cost and freight delivered to Chinese port).
According to analyses issued this month by Scotia Capital in Toronto, and drawn from a variety of Chinese and foreign industry sources, K + S has been selling into China within a price range of $540 and $565 per tonne CFR. This is more than $100 per tonne below the price at which supplies of potash are reported in the trade to have landed in China late last year. Although K + S has in the past made relatively small sales of potash to Chinese importers, and the new number remains small – in total, Chinese import volumes of potash have been between 7 million and 9 million tonnes per annum between 2006 and 2008 — the significance of the K + S move is its timing and its price.
For at the end of 2008, all the major international potash suppliers to China, including Canpotex, BPC, and ICL, wound up their contracts, and halted fresh deliveries to China. The suppliers then proposed reopening contract negotiations for this year with the Chinese, but there was no response. Not until this month have the Chinese announced the formation of a “buying consortium”, including Sinochem, CNAMPGC and CNCCC, and contract talks have commenced officially. Sources close to the table say the Chinese side is in no hurry to make a deal.
And that’s what makes K + S tactics significant, and its intentions worth investigating. In March Canpotex sold two cargoes of North American potash into Malaysia and Indonesia at a price of $735 per tonne (CFR). This was the first price reduction from that exporter since last year. In April Canpotex followed with the sale of two additional cargoes to Brazil priced at $750 per tonne. BPC had already announced in March that it was offering a 25% discount off the spot price of Russian and Belarussian potash on the Brazilian market from $1,000 per tonne to $750-$765 per tonne, good for two months to the end of May. But the downward trend of prices hasn’t aroused the buying interest from the Chinese, either for the Russian or the North American product. Only K + S has signed new orders, at an even deeper discount.
Chinese buyers acknowledge that the K + S sales to date of 170,000 tonnes, even if they are repeated in the current quarter, make a drop in the bucket, by China’s import standards. But they are having a much bigger psychological impact, Chinese trade sources claim. This is because K + S sales agents around China are convincing the domestic market that they will keep up supply volumes, and keep down price growth. If another 100,000 tonnes of K + S potash land before May 25, when the International Fertilizer Association holds its annual conference in Shanghai, Sinochem and CNAMPGC may decide to keep talking past deadline, and wait for a further drop in price. India, the next largest global importer, appears to be delaying renewing its annual contract until it sees what the Chinese do.
Chinese buyers are also reported by Scotia Capital in Toronto as saying that right now the spring planting requirement for potash has been met, and that 3 million tonnes of potash remain in inventory. The Chinese are claiming they have enough potash in stock to last for another three months. But they will have to conclude the new contract negotiations in time for deliveries to be made by the time the autumn planting season begins.
BPC and Uralkali refuse to comment on the China negotiations. But industry sources report BPC sales director, Oleg Petrov, as saying publicly on April 28 that India’s potash inventories have dropped very low, while China has enough inventory for several months, making it likely for the Indians to try striking a deal before the Chinese feel the need to do the same.
Market analysts in Europe and North America say they have only recently seen the evidence of the K + S move in China. “In general,” one told Asia Times, “everyone is waiting for [BPC and Canpotex] to negotiate.” How long the talks will last is anyone’s guess. One Canadian analyst said he is sure they must be concluded, and new volumes and prices agreed, in time for deliveries to reach China before September.
Roydel Stewart, the fertilizer specialist at Alfa Bank in Moscow, told Asia Times that the market had been taken by surprise by the K + S initiative in the China market. He said that when asked, K + S “vehemently deny that they sell to China at below-market prices. K + S never reports its potash production or sales. They group it with other products, so we don’t know exactly how much potash they produce and sell. So it is possible, I suppose, that they are sending some volume to China…”
K + S spokesman Katja Seeger was asked what sales strategy K + S is keeping under the famous umbrella; and whether it is K + S’s aim to undercut the supply and price controls of its international rivals, and improve its potash sales to China. She replied: “China is the biggest potash market in the world. K+S KALI GmbH traditionally supplies this market and will go on doing so. The quantities we ship are considerably smaller than those of some competitors. We ask for your understanding, that at this point we won´t discuss the strategic orientation of our business.”