Not sounding to good......
Potash prices to fall to lowest since 2007, says Macquarie
15:32 UK, 11th Mar 2015, by Agrimoney.com
World potash prices are poised to fall to levels not seen since 2007 - a decline potentially fuelled by the break-up of the system of annual contracts with China and India, which act as key industry benchmarks, Macquarie said.
The bank forecast potash prices, as measured in the port of Vancouver, dropping to average $270 a tonne in the last quarter of this year, down from a current level of $305 a tonne.
By 2018, the potash price will fall further, to average $250 a tonne.
"We see no upside for potash prices over the next four years," Macquarie said.
Supply surplus
The bank highlighted the likelihood of a drop in demand this year, by 7.1% to 54.35m tonnes on its forecasts, after importers last year rebuilt inventories, buying more of the nutrient than they needed.
Global potash consumption rose 9.7% to 58.51m tonnes last year, but still remained 4.36m tonnes below output, on Macquarie estimates.
"In our view, much of this [surplus] is sitting in producer and consumer stocks."
The bank also noted weakness in currencies of major producing countries, notably Russia, allowing for softness in values of a product which is denominated in dollars.
"With key producer currencies falling, we fell pricing may have to move towards $250 a tonne on a spot basis to see any meaningful, sustained supply reaction," to curtail oversupply, Macquarie said.
'Contract system may not survive'
Furthermore, there is a growing likelihood that the system of annual contracts between potash exporters and China and India, which set prices for other buyers, will collapse, the bank said, noting the apparent impasse in current talks between negotiators from China and the major importing countries.
Producers such as Uralkali are reported to be seeking increases of some 10% from current prices of $305-335 a tonne, while Chinese negotiators are holding out for potentially a discount.
"Our view is for the balance of power to be skewed further towards the Chinese buyers for every day of delay, as the position of global potash producers weakens.
"High buyer inventories will… ultimately weigh on pricing."
With the views of buyers and sellers "increasingly divergent", there is an "increasing chance that the contract system itself may not survive 2015".
Share price implications?
The end of the contract system would be particularly damaging for producers, in reducing certainty over earnings which is likely reflected in stockmarket ratings.
After the end of the annual contracts in iron ore, Rio Tinto shares have traded at a ratio of 5.1 times earnings before interest, tax, depreciation and amortisation (ebitda), compared with 6.7 times for the last five years while the system was still in place.
Shares in Brazilian miner Vale have fallen to 3.5 times from 4.7 times, on the same basis.
Macquarie's comments follow an acknowledgment last week by Oleg Petrov, head of sales at Uralkali, of the potential for China to seal only one contract this year with exporters, rather than the two it has often agreed.
"Given the fact that the contract has delayed, I would say that there is a risk that there will be only one contract this year and… volumes might be less than we saw last year," Mr Petrov told investors.
India vs China
There were in fact "chances for India", unusually, to settle a contract ahead of China, given that India "does not have a lot of inventory and there is a need for the contract to be signed".
And if India does sign first, this could put upward pressure on the values that China eventually pays, given the role of contracts from the two key importers in ending market uncertainty, and encouraging demand from other buyers.
"We believe that the one who is going to be the second will pay a high price because of the effect which the first contract creates," Mr Petrov said.
China's potash inventories start this year at some 4.5m tonnes, up from 3.0m tonnes a year before, on Macquarie estimates.
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