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Credit Suisse cuts forecast for potash prices

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Prices of fertilizers, even potash, will fall next year, undermined by "excess supply", Credit Suisse said, rating phosphate groups as the best bet for investors in fertilizer shares.

The bank, which has long forecast a drop in nitrogen and phosphate prices next year, downgraded expectations for 2013 potash values to below 2012 levels, after "demand softened materially" in the last few months.

World potash deliveries, which came in at 55m tonnes last year, will fall to 49m-50m tonnes in 2012, said the bank, which had previously pegged this year's figure at 50m-53m tonnes.

While a resolution looms to the refusal by top importers China and India to sign fresh contracts - a hold-out, aimed at securing lower prices, which has been at the centre of the market's malaise – this will not foster a return to rising values.

'Serious issue'

Potash producers' ability to squeeze out high prices in the talks have been weakened by a decline in South East Asian potash prices, which usually stand at a $50-a-tonne premium to Chinese ones, to a small discount.

"This is a serious issue for the [potash] industry heading into contract negotiations with Chinese buyers," Credit Suisse said, adding that "industry discipline is likely to weaken the longer China an India hold out".

The large potash producers market exports through cartels, Canpotex in North America and BPC in the former Soviet Union, supporting values, although price falls even in countries where buying has been evident "suggest cracks have opened up in the pricing discipline in the global potash industry".


And the bank signalled some structural flaws in the market, given the decline in potash deliveries from a high of 57m tonnes five years ago, despite high crop prices.

Credit Suisse potash pr

ice forecasts, change on last, and (year on year)

Q4 2012: $460 a tonne, -$15 a tonne, (-3.8%)

2012: $467 a tonne, -$4 a tonne, (+6.9%)

2013: $445 a tonne, -$30 a tonne, (-4.7%)

2014: $445 a tonne, -$10 a tonne, (no change)

Prices for Vancouver spot standard, FOB

"To see negative growth in a period of strong, albeit volatile, grain prices suggest to us that… there is lack of understanding of the merits of using potash in some developing markets, where the growth is supposed to come from."

Until farming practices change industry forecasts of 3-5% growth in potash demand "are too optimistic", Credit Suisse added, noting a significant level of new projects in the pipeline.

Company warnings

The comments follow a series of company cautions over the market, blamed on the intractable talks with China and India, with Germany's K+S and US-based Mosaic cutting performance forecasts this week, although PotashCorp on Thursday forecast a sharp revival to 57m-58m tonnes in world deliveries in 2013.

"We see that as a big improvement over this year and we think 2014 is also going to be a strong volume year," PotashCorp chief executive Bill Doyle said.

Credit Suisse warned of "excess supply" in urea too, given the coming online of at least 11 production projects, with capacity for nearly 10m tonnes of the nitrogen fertilizer, equivalent to some 25% of export supplies.

"We expect to see the excess urea supply to increase by 2013-14."

Phosphate best bet

And the phosphate trade was "generally slow, with weak buying in all markets", the bank said, forecasting "soft" demand in the current quarter, and with prices "remaining under pressure as producers long on product search for buyers".

However, one factor in favour of phosphate group's profits was that the coming onstream of Saudi Arabia's huge Ma'aden phosphate project "has not been as severe as several forecasters suggested".

Furthermore, costs of raw material, such as phosphoric acid and sulphur, for phosphate groups are "softening", the bank said, rating the sector the "best positioned" for equity investors within the fertilizer industry.

Credit Suisse named Australia's Incitec Pivot, Israel's ICL and PhosAgro, the Russian producer listed in London, as its "preferred plays" in fertilizer.


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