Canadian Analysis Shows That K+S Is Undercutting The Big Russian And American Players In The Key Chinese Potash Market
By John Helmer in Moscow
minesite.com
In the global marketplace for potash there are none sharper at spotting a bargain than the Chinese. 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, South East Asia, and Brazil. During the last few years, China’s demand has been supplied from several sources. These include 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). And during the past four years of booming commodity prices, 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 per cent. 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 per cent, and to the rest of the world by 78 per cent.
But it’s spring in China, and after an unusually rainless winter, farmers preparing to plant need 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 the China National Agricultural Means of Production Corporation (CNAMPGC), the China National Chemical Construction Company (CNCCC), and Sinopec - the three major Chinese buyers – all seem to be keeping their pens in their pockets, and their contract orders off the table. So 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, and has put 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 US$1.7 billion. Morton’s little girl became K+S’s on April 2nd of this year.
But a much bigger wind blowing the umbrella for K+S has been potash demand. During the commodity boom, salt lost proportional value in the group’s total revenues of €4.9 billion. The growth in potash prices drove the K+S group’s potash and magnesium division too. K+S says it lifted eight million tonnes of potash and magnesium last year from six German mines. It now 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 31st 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 Minesite to confirm what the data implies – 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 US$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 US$540 and US$565 per tonne CFR. This is more than US$100 per tonne below the price at which supplies of potash are reported in the trade to have been 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, 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”, which includes Sinochem, CNAMPGC and CNCCC. Contract talks have now commenced officially, but 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 US$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 US$750 per tonne. BPC had already announced in March that it was offering a 25 per cent discount off the spot price of Russian and Belarussian potash on the Brazilian market, down from US$1,000 per tonne to between US$750 and US$765 per tonne. But the downward trend of prices hasn’t aroused the hoped-for 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, are 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 lands before May 25, when the International Fertilizer Association holds its annual conference in Shanghai, Sinochem and CNAMPGC may decide to keep talking past the 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 three 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 in time for the autumn planting season.
BPC and Uralkali refuse to comment on the China negotiations. But industry sources report BPC sales director, Oleg Petrov, as saying publicly on April 28th that India's potash inventories have dropped very low, while China has enough inventory for several months, making it likely that the Indians will 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. Roydel Stewart, the fertilizer specialist at Alfa Bank in Moscow, told Minesite 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.” |
