By John Helmer in Moscow
The Belarusian Potash Company (BPC), the trader for Uralkali and Belaruskali, has announced it will offer a 25% discount off the spot price of potash on the Brazilian market from $1,000/tonne to $750-$765/tonne (including cost and freight, CFR). The offer is good from this month to end-May.
Brazil is one of the drivers of the spot market for potash; whither the Brazilians lead, the Chinese and Indians are bound to follow.
To date, producers have managed to defend pricing at the nominal $1,000/tonne CFR level reached in mid-summer 2008 by concerted production and supply cuts. In practice, during the grim second half of last year, only a minor share of global potash sales — maybe no more than 5% — were done at the $1,000/tonne price, while the de facto average price on the market has been at the $600 to $650/tonne level since August.
Industry analysts claim that Brazil has been hit hard by the liquidity crisis and economic slowdown, with fertilizer purchasing activity virtually coming to a halt. But in 2008, Brazil imported more potash than China, India, or the southeast Asian market altogether, and the accumulated inventories have yet to be emptied to the point where importing can start again. To do that, there is anecdotal evidence that Brazilian importers are demanding the “Carnival discount” of 50%; the price of boxes to watch the Rio Carnival’s closing pageant last month were reportedly cut to 50% of the 2008 level in dollar terms.
The BPC discount price offer is less than it seems, for the new price represents a 3% to 5% increase over the average price to Brazil for all of 2008, which was $725/tonne CFR.
Brazil is the largest single-country market of potash for Uralkali; it accounted for approximately 21% of sales in 2007 and 2008, while the proportion of sales to China shrank from 25% in 2007 to 19% in 2008. Sales to Brazil for BPC as a whole comprised 11% of sales by volume last year. The reason for the geographic shift in the potash market was the jump in sales on higher spot-market pricing, making it more profitable for producers to sell to Brazil than to China or India. In Brazil, according to BPC sources, most sales are made to the top two or three customers. They buy potash with prices fixed for a particular bulk delivery on a quarterly basis. Prices are set, taking into account the expected purchase volume for the period.
While the potash mines are currently operating at 30% to 35% of their production capacity, BPC’s lower price offer for Brazil, if accepted, should stimulate an increase of deliveries to the region. According to one analyst, a new benchmark of $750/t will have a flow-on effect to the Southeast Asian spot market. This, in turn, would put pressure on Chinese contract buyers, as well as the Indians, to accept a higher price than either Beijing has been willing to accept so far, or Minsk and Moscow agree to offer.
The three-month limit of term indicates wishful thinking on BPC’s and Uralkali’s part that market demand for potash may firm enough by early summer, so that producers may again attempt to adjust prices upwards. Moscow industry sources say they expect an agreement with the Indians in May, while the Chinese contract may not be concluded until June.
Unicredit analyst in Moscow, Anna Kochkina, reported to clients on Thursday: “The new price leads us to believe that Uralkali may be able to obtain at least last year’s average price from other markets, including $410/tonne for China rail deliveries. We estimate that our target [share] price for Uralkali would increase to roughly $32 per GDR (more than 375% upside from yesterday’s close), if the company begins shipment to Brazil at $750/tonne in April 2009 and at average 2008 prices to other destinations in June 2009. In this case, we estimate Uralkali’s EBITDA at $1.0bn in 2009F and $1.7bn in 2010F, which should be sufficient to cover all government charges, including those for lost reserves, previously estimated at $3 billion.”
Uralkali’s future remains dependent, however, on a decision by the Deputy Prime Minister Igor Sechin on whether to charge Uralkali the full $3 billion penalty, and press controlling shareholder, Dmitry Rybovlev to give up his shares to cover the liability. Sechin is evidently in no hurry. To say the obvious, “the stock is likely to be volatile until the political risks are resolved,” Kochkina reported.
A report from Uralsib Bank is more guarded on the implications of the BPC price offer. “We estimate”, reports analyst Anna Kupriyanova, that “the 25% price decrease by BPC is only symbolic in nature and has little to do with actual potash prices. [The new price offer] may spark negative sentiment for the potash market.”