January 2, 2013

Canpotex to supply potash fertiliser to China's Sinofert

Canpotex Ltd, the offshore sales agency for the three North American potash producers, has signed a six-month agreement to supply potash fertiliser to a subsidiary of China's Sinofert Holdings Ltd at a steep discount of US$70 per tonne from the last contract price.


Shares of the three potash companies - Potash Corp of Saskatchewan, Mosaic Co and Agrium Inc. - rose in morning trading, even though the discount was larger than some analysts were expecting. The sales will help reduce a massive potash stockpile from mines in the Western Canadian province of Saskatchewan.


Canpotex said on Monday (Dec 31) that it would supply Sinofert Fertiliser Macao Commercial Offshore Ltd with one million tonnes of potash for the first half of 2013.


In its brief statement, Canpotex released the size of the discount but not the price itself. However, the previous contract price, established in March, was believed to be US$470 per tonne. That would mean the new contract represents a 15% discount to supply Sinofert at US$400 per tonne.


"It looks to be a trade-off between price and volume," said Raymond James analyst Steve Hansen. "Canpotex prefers price first. I was surprised by the magnitude of the cut, but it's a large volume commitment."


The price, while much lower than an expected US$427 per tonne, should help spur a recovery in demand, said Scotiabank analyst Ben Isaacson. New supply deals with China and India, the world's two biggest potash consumers, were expected by late summer. However, ample supplies in China and a decreased Indian government subsidy of farmers' purchases of the fertiliser delayed the contracts.


North American potash supplies in November were 58% above the five-year average. Potash Corp, the world's biggest potash producer by capacity, has temporarily shut down four of its Canadian mines to support prices.


A deal with China will provide a much-needed buyer for the nutrient, which is used to boost crop yields, but Chinese and Indian buyers typically pay the lowest prices in the global market. The contracts are closely watched, as international spot market prices are usually pegged at a premium to the contracts.


Sinofert's lower price still leaves the potash producers with healthy profit margins, said Ernie Lalonde, senior vice president of mining for DBRS Limited, which rates the debt of companies like Potash Corp.


Potash Corp shares were up 1.1% in New York and 0.9% in Toronto, while Mosaic climbed 1.6% and Agrium added 0.8%. A deal between Canpotex and Indian buyers is expected sometime in the first quarter of 2013.


"The (China) deal should act as a catalyst to get India moving to a deal and perhaps more importantly unfreeze the other international markets that have been sitting on the sidelines waiting for an agreement," said Paradigm Capital analyst Spencer Churchill.


The deal should also hasten talks between China and Canpotex's chief rival, Belarusian Potash Co, which sells the crop nutrient on behalf of Uralkali OAO and Belaruskali, Hansen said. Uralkali has said it expects negotiations on a contract with China to begin in February.

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