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China potash affordability rises as key deal looms

Potash prices in China will in 2014 prove their least expensive, compared with corn values, since at least the 1990s, PotashCorp said, raising hopes over a fresh import deal seen as critical for the market.

An affordability index for potash, based on comparing values of the nutrient with corn prices, will reach 1.2 for China next year, up from an average of about 0.9 for 2013, and the highest level on records going back to 2000, the group said.

"Prices for major field crops, such as corn, have increased substantially as farmers have been challenged to keep pace with demand growth," said Canada-based PotashCorp, the top potash producer by capacity.

"With potash prices moving lower over the past year, the ratio of corn prices to potash prices is projected to be at its most favourable level in more than a decade.

"We expect this will be one factor that can have a positive impact on potash consumption."

Fruit needs

Potash consumption by China, the top importing country, is also being underpinned by the growing fruit and vegetable industry, which actually uses, at 40% of overall demand, a little more of the nutrient than the grains sector.

"Production of all of China's major crops has increased tremendously over the last two decades, but particularly fruits and vegetables, which have more than tripled," PotashCorp said.

"Production of these high-quality crops requires significant application of nutrients, particularly potash, which helps improve colour, taste and texture."

However, the growing size of farms, as family plots are consolidated into larger enterprises, bodes well for consumption by cereals farmers too, whose corn yields are about half those of the US, encouraging mechanisation and efficient fertilizer applications.

By the end of last year, nearly 18m hectares of land rights had been transferred, equivalent to more than 20% of the total family-contracted area, under a programme started in 2008.

Key deal

The comments come as investors are early anticipating the next Chinese import contract for potash, which comes against a backdrop of turmoil in the market after the break-up in July of the Belarusian Potash Company cartel, which controlled more than 40% of world trade.

The move spurred a sharp drop in potash prices, which has spread to other fertilizer markets too, as buyers backed-off in expectation of still lower values, and provoked a series of cutbacks and profit warnings at producers including PotashCorp.

Supply contracts for China, which as the biggest importer gains favourable prices, typically set a floor which is followed by other buyers.

"A China contract (in early 2014?) could help bring some stability as it would allow for some price discovery," said John Chu at broker Altacorp.

'Opportunistic'

Wayne Brownlee, the PotashCorp finance director, said last week that Chinese, and Indian, purchasers were likely to be "opportunistic" in acquiring potash "and try and sort of find the bottom of the marketplace - being good buyers that they are".

One scenario was to "see the Chinese walking a price early in the first quarter, and that will provide a floor price which will encourage probably the Indians to get in and lock in some tonnage".

However, he acknowledged the importance of the former Soviet Union producers in the market, and the prospects or not of a repair of relations between Belaruskali and Uralkali, former partners in the Belarusian Potash Company cartel.

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