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By John Helmer in Moscow

Potash prices are soaring and the major beneficiary is LSE quoted Uralkali, Russia’s largest producer.

A handful of patience is worth more than a bushel of brains. That is what the Dutch used to say, while watching their tulips grow.

But for the world’s potash miners, meeting this month in Canada, a bushel of grain is another kettle of fish. Referring to the April 3 record of $6 fixed for a bushel of corn on the Chicago Board of Trade’s May contracts, a leading Canadian potash miner said this was a “beautiful chocolate sundae”. The increasing pressure on the corn price of North American ethanol demand, he added, is the “cherry”on the cake.

The mixed metaphors make the point. The global feast of foodstuffs is driving potash demand far faster than the miners can produce it. The result is that the benchmark commodity price being set by Uralkali and its trader, Belarusian Potash Corporation (BPC), the swing producer in the world, is driving up the share prices of the mining companies, which deliver the fertilizer to the market.

Vladislav Baumgertner, chief executive of Uralkali, told the Canadian producers’ conference he believes the spot price for potash is likely to go over the $800 level (calculated per tonne of potassium chloride with freight and insurance) in the fourth quarter of this year.

A table in his presentation shows the price dynamics for potash from minehead to consumer since January 1. Roughly 40% of Uralkali’s potash is sold by BPC on term contracts renegotiated once a year, typically in the spring for the Indians, followed by the Chinese. The BPC benchmark is fixed by the contracts signed with one or a few large fertilizer distributors in the main markets. In India, BPC has one client – Indian Potash Ltd (IPL). In Brazil, there are 2 to 3; in China, several. Analysts say that roughly 10 of the BPC’s largest buyers account for more than half of its sales around the world.

According to Baumgertner, at the start of this year the contract price for India was $270. In March, BPC and IPL agreed that, starting in May, and running until May 2009, the new price will be $625. This was an increase of 132% year on year. On April 1, Oleg Petrov, deputy CEO of BPC, said he will use the Indian price as the benchmark for the Chinese negotiations; the China term-contract price negotiated last year, and running through this spring, was $250. For potash delivered by Uralkali by rail or sea to northeastern China, the January price was $370. Brazil, the third of the main markets for Uralkali, was paying $450 in January. It is under pressure to accept the rising benchmark. BPC officials say they expect the spot price to reach $700 by July, and $800 by November. Petrov said on Monday that a price of $1,000 per tonne was approaching “rather fast”.

Baumgertner explains that the dynamics of global demand and buying power this year are changing the geographical direction of Uralkali’s sales and shipments. China represented a 40% share of sales in 2007; it will drop to 23% this year. India is up from 7% to 12%; Southeast Asia up from 11% to 17%; Europe up from 8% to 12%, and the US, at zero for Uralkali last year, will be 4% this year. Brazil remains constant at 21%. When the boats can change their ports of call, as a Moscow brokerage analyst notes, China’s traditional buying and bargaining power dwindles. “The Chinese market is very important for Uralkali, but the fact that Uralkali can reallocate products to other markets in the current environment increases the chance that the new pricing level for China will be much higher than we expect.”

When BPC’s volume of shipments are counted with direct shipments to China by Uralkali Trading, the combination of Uralkali and Belaruskali today account for 33% of exports worldwide. Silvinit, Russia’s second potash producer, trading on its own, takes a 12% market share, giving the Russians altogether a 45% grip on the market. The rival North American trader, Canpotex, based in Singapore, is down to 26%, and Germany’s K+S Group is at 14%.

MDM Bank in Moscow issued an advisory to mining market investors last week to “highlight the operating leverage expected from these increases that could lead to further increases in earnings estimates for Uralkali. The stock has now reached another all time peak level, driven partly by anticipation of a positive outcome from these negotiations. On one hand, we view the valuation as extremely rich at this point, but on the other we recognize the stock’s strong momentum as this is one of the few plays in the Russian universe on global food inflation.”

At its conference with analysts this week, Uralkali management suggested that the company may drop long-term annual contracting altogether, even with China, and switch to contracts of less than a year. That, according to the company, is bound to put further upward pressure on the negotiations with Chinese importers.

The relationship between the potash reference price and Uralkali’s share price is plain. In 2006, Uralkali’s share price ranged between $2 and $2.50, with a market capitalization of about $3 billion. In October 2007, when it was listed on the London Stock Exchange for the first time, the share price was $3.35; market cap about $5 billion. Last Friday, Uralkali’s share price was $9.25, market cap $19.7 billion. On Monday, it climbed 8% to $10.20, market cap $22 billion. In a year, the company has increased its value more than fourfold.

With growth dynamics that look better than gold, the potash leaders are publicly asking whether potash can remain the only commodity that is bound to keep rising in value. At the Canadian conference, William Doyle, head of Potash Corporation, the North American leader, said that he can see no let-up. “You are going to get higher yields through using GMO [Genetically Modified Organism] seed. You are going to get higher yields through crop protection chemicals, and higher yields through our nutrients.” Potash Corp reported $4.8 billion in aggregate fertilizer sales in 2007. It produces nitrogen, phosphate, and potash fertilizers; potash sales by Potash Corp last year amounted to $1.6 billion, 33% of the aggregate. By comparison, Uralkali is a pure potash producer, with $886 million in reported sales in 2007.

The North Americans and Russians noted at the Canadian convention that food inflation, grain shortages, and the rise in fertilizer prices are triggering government controls. “I wouldn’t want to see commodity prices go up a lot more,” said Michael Wilson, CEO of Agrium, the third ranked North American potash producer. “We are starting to get a lot of government interference in the agriculture business, looking at export taxes and caps on nutrient prices.” Agrium, a multi-mineral producer, reported aggregate sales last year of $5.3 billion, of which just 6%, $316 million was accounted for by potash.

The Russian government has introduced export duties for fertilizers, and such chemical ingredients as sulphur. Quotas on export volumes have been threatened. Domestic price growth controls are also being negotiated with the main producers and suppliers. Last week, rumours that the Chinese government will shortly impose draconian export taxes of up to 135% on urea and phosphate fertilizers; China does not produce any potash fertilizers.

Moscow industry analysts calculate that in cashflow terms, Uralkali will more than offset the cost of the new taxes by increasing both volume of exports and price. Uralkali announced last week that in the first quarter to March 31, the company produced 1.25 million tonnes of potassium chloride; this was up 5.6% year on year. In the month of March, production growth at the minehead was even faster at 8%. The data have lit a fire under the share price — it is up 10% on the week.

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