Uralkali Ready to Cut Potash Output to Protect 45% Price Gain: Commodities
By Firat Kayakiran
“Our strategy is that price is much more important than volumes,” Chief Financial Officer Victor Belyakov said in an interview yesterday in London. “It’s a strategy for most of the big players in the market. We usually cut some production to come up with a fair price.”
Russian producers and those in Canada, like Saskatoon, Saskatchewan-based Potash Corp., account for about 65 percent of global output, said Mark Connelly, a New York-based analyst at Credit Agricole Securities USA Inc. Suppliers are seeking to protect a 45 percent recovery in benchmark U.S. Midwest potash prices since July 2010.
“If the Canadian and Russian producers are aggressive in matching supply and demand, it shouldn’t matter very much what other producers do,” Connelly said in a telephone interview yesterday.
Potash, mined from deposits of salts laid down in ancient seas and captured in rock layers, helps plants to grow strong roots, resist disease and withstand drought conditions. Canada accounts for about 52 percent of estimated global reserves and Russia 21 percent, according to the U.S. Geological Survey.
Canpotex Ltd., owned by Potash Corp. (POT), Mosaic Co. and Agrium Inc. handles exports for North America’s largest suppliers. Potash Corp. is scheduled to report fourth-quarter earnings before the start of trading in New York tomorrow.
Uralkali pared its 2012 production target by about 8 percent to between 10.5 million metric tons and 10.8 million tons to bolster prices, Belyakov said. Berezniki, Russia-based Uralkali, which had record 2011 output of 10.8 million tons, forecasts global demand for fertilizers to be similar to last year’s 58 million tons, he said.
Potash Corp., which announced temporary cuts at two mines in Canada last month, has since unveiled a four-week halt at its Allan mine and an extension of the shutdown at its Rocanville operation. Combined, Potash Corp.’s cuts total about 1 million tons, Credit Agricole’s Connelly said.
“Uralkali is following Potash Corp.’s strategy, and historically, Russian producers didn’t always do that,” he said. “If Russia and Canada have the same strategy, this is a much better business than it used to be.”
Canadian producers in 2009 succeeded in keeping prices higher than other crop nutrients by curbing output after the global financial crisis, Connelly said.
‘Wait and See’
Suppliers are seeking to prevent a drop in prices this year, concerned that demand has been “slow,” said the analyst, who forecasts 2012 prices to rise by $25 to $575 a ton in the U.S., compared with $380 in July 2010, and to settle at $520 in China and India.
JPMorgan Chase & Co. lowered its price forecast for potash by 6 percent to $419 a ton, excluding the cost of freight, insurance and taxes. “With India refraining from active buying in the fourth quarter of 2011 and Brazil buyers not rushing into $580 a ton, we see a downside risk to our 2012-13 potash price forecasts,” Yuriy Vlasov, an analyst at the bank, said in a report dated today. The Brazil price includes some transportation costs.
Mosaic (MOS), North America’s second-largest potash producer, said on Jan. 5 that fertilizer buyers are taking a “wait-and- see” attitude toward replenishing inventories by postponing purchases because of concern about the global outlook for economic growth.
“In 2012, we see firm potash prices in the first half of the year, tempering slightly in the back half on lower agriculture commodity prices,” Macquarie Group Ltd. analysts including Colin Hamilton wrote in a report dated Jan. 18.
“Demand is there globally,” the analysts wrote. “However, buyers are deferring risk by waiting to purchase volume. North American buyers will come to market soon as potash needs to be flowing to farm level before planting season begins in April/May.” International buyers will show interest in the second quarter, the report shows.
Potash imports by China, the largest user of the crop nutrient, may decline this year for the first time in three years amid falling demand and high inventory, Gavin Ju, a consultant at researcher CRU International Ltd, said on Jan. 13.
Uralkali last year sold potash for $490 a ton to Indian customers in annual contracts, Belyakov said. Prices for Chinese customers, which sign semi-annual contracts, rose to $470 a ton in the second half from $400 in the first half, he said.
India, the largest offshore importer of potash, will delay signing new contracts to buy the nutrient until July and will instead rely on inventories, P.S. Gahlaut, managing director of Indian Potash Ltd., said Jan. 6. India’s current deal with potash suppliers expires at the end of March.
Uralkali is negotiating with Indian customers and plans to start talks with Chinese buyers within a couple of months Belyakov said. Chinese settlements could be reached in March and Indian agreements in the middle of the year, Connelly estimated.
The International Fertilizer Industry Association forecast global demand to increase by 3 percent this year, according to a Jan. 5 report. Demand for fertilizers exceeds supply, mainly because of delays in commissioning new capacity, the association said.
“A fair price should justify development of greenfield projects, because brownfield projects are limited,” Belyakov said. “But to construct a 2 million-ton production facility will cost you $3 billion to $4 billion and take at least 7 years, which brings the cost to $500 per ton at the mine. Right now, prices aren’t as high as that.”