September 24, 2009 / 5:43 PM / 10 years ago

POTASH-Lack of China deal may leave market drifting

(This story appears as part of a special package highlighting the global potash industry.)

* China potash inventories high, no rush for imports

* Inventory seen as comfortable through spring 2010

* Chinese potash contract could get pushed into 2010 (Figures in U.S. dollars unless noted)

By Donny Kwok and Moxy Ying

HONG KONG, Sept 24 (Reuters) - China, the world’s largest potash buyer, still has high inventories and is in no rush to resume imports, leaving the market searching for a price floor on the key fertilizer ingredient.

China imports 5 million to 8 million tonnes of potash a year, giving it a key role in the market for the commodity, one of the essential minerals needed for plant growth, alongside nitrogen and phosphate.

“Domestic consumption is still digesting the inventory. I don’t expect to see a shortage of potash (in China) in the second half of the year,” said Lawrence Chor, an analyst at Taifook Research.

China’s huge purchasing power gives it the ability to negotiate aggressively with suppliers, who have already been forced to cut prices due to a global slump in demand.

Industry officials do not expect China to return to the market until next year, after drawing down its own surplus supplies, and it will use a new Indian import price of $460 a tonne as a benchmark for negotiations.

That was the price set in July when Indian importers signed contracts to import the bulk of this year’s potash requirements. It is below both last year’s contract price of more than $600 and the spot market price of $700 at the time — and well off last autumn’s record of $1,000 a tonne.


But if that contract is not signed soon — and the chances are that it won’t be — there will be no price guide for other would-be buyers, and that would be bad news for producers.

“Those contracts might not be concluded this year. The potash that we have at the moment is enough to maintain a normal operations till first half next year,” said Xiaoman Ni from BOCI Research, who puts the local demand for potash at less than 6 million tonnes this year.

“The potash price is at the bottom now and it may stay there even during the first half of next year,” she added.

A contract delay until 2010 would spell additional uncertainty for both markets and buyers, who expect the Chinese contract to set a floor on potash pricing.

Many buyers were stung when potash prices collapsed this year and were forced to book major inventory writedowns. They are nervous about restocking at current prices, in case a China contract comes in at an even lower price.

Tiafook’s Chor said neither Sinofert nor China itself would need to buy potash until inventories fall. He estimated China’s potash consumption at 8 million to 9 million tonnes next year and said demand could grow by 7 percent to 8 percent a year if prices hold steady.

Sinofert Holdings (0297.HK), which imports more than half China’s potash, is more optimistic and expects China to use about 10 million tonnes in 2010, according to a recent research note from Bank of America Merrill Lynch.

The note said Sinofert had about 2.6 million tonnes on hand at the end of June and would likely draw down inventories to normalized levels before buying more.

“We maintain our view that inventories in China remain comfortable through spring 2010, and any contract settlement would be a function of price more than demand,” said Goldman Sachs analyst Jessie Pinglun Lai, who has a “sell” rating on Hong Kong-listed Sinofert.

“We expect potash buyers to push for further price reductions, and see more downside risk to current prices,” Lai said in a note to clients.

Still, Sinofert expects demand to recover.

“We believe that, in the next couple of years, China’s fertilizer consumption will overcome the downtrend as seen in the past two years, and growth in market demand is foreseeable,” Chairman Liu De Shu said in a statement. (Editing by Janet Guttsman)

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