K+S shares miss out on China-potash-deal bounce

Shares in K+S failed to enjoy the bounce enjoyed by rival potash groups following the long-awaited signing of a Chinese contract, amid cautions that higher-cost producers may face pressure from the pricing of the deal.

Canpotex, the North American potash export consortium, on Monday revealed it had agreed to supply 1m tonnes of the fertilizer to China's Sinofert in the first half of 2013.

The deal with the top importing country, whose deals are watched with close interest throughout the potash market, ended months of uncertainty blamed for bringing potash groups a soft finish to 2012, and which has lifted North American producers' inventories to 58% above their five-year average.

However, while the volume of the deal beat market expectations, the price, of $400 a tonne, down $70 a tonne on that of the last two contracts, was below the level that investors, and North American producers such as PotashCorp, had been holding out for.

High vs low cost producers

The cut in the price, to below the level of $420 a tonne investors had expected, looks set to prompt underperformance by potash producers such as US-based Intrepid Potash and Germany's K+S, with higher costs of output, broker AltaCorp said.

"Expect the higher-cost producers to take the biggest hit," the broker said, noting the market reaction to a bigger-than-expected drop, of $180 a tonne to $460 a tonne, in prices agreed by Russia's Silvinit with India in 2009.

The likes of K+S were the "biggest underperformers" among potash groups for the first two months after that deal with India, the second-ranked potash importer,

"We would not be surprise to see a similar scenario play out this time as well," AltaCorp's John Chu said.

'Strong rebound'

Shares in K+S eased 0.3% to E34.885 in Frankfurt on Wednesday, their first chance to react to the news of the Canpotex-China agreement.

Shares in sector giants Mosaic and PotashCorp, both members of the Canpotex consortium, gained 2% on Monday - when stock in Intrepid Potash gained 2.4%.

AltaCorp added that it expected the China deal to be seen, ultimately, as positive for the sector despite the weak price, potentially heralding a long-delayed contract with India at about $420 a tonne, and spurring demand elsewhere too.

"We believe this contract [will] set the stage for a strong rebound in potash demand and put a halt to sliding potash prices," Mr Chu said.

"Once we see evidence that demand is picking up significantly for spring planting and inventories being restocked, we suspect we will see a strong rebound in the sector's share price performances.

"But we do recognise that, based on history, the sector may see a decline or be range bound in the meantime."

ICL shares downgraded

Other broker reaction to the China deal included a cut by broker Clal Finance to its price target for Israel Chemicals shares, to 45 shekels from 52 shekels, while keeping the stock at "market perform".

Israel Chemicals stock initially reacted poorly to the deal, falling 2.8% to 44.64 shekels on Monday.

However, they have recovered since, standing on Wednesday at 45.79 shekels, not far from their level before Canpotex announced its China agreement.

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