The Silvinet Deal Continues to Hit Potash and Mosaic

Potash (POT) and Mosaic (MOS) were hit hard Friday [Jul 10: Potash Steamrolled] on news that a Russian provider, Silvinet had signed an agreement with major buyer India for a steep discount, $460 a tonne. To show you the scope of that pricing, all the other bidders apparently were in the $625-$635 range. Both stocks continued weak Monday morning, 3-4% down - interestingly Mosaic (MOS) was surging Friday ahead of this news report due to a flurry of call buying and the ever present "takeover rumor".

• India has agreed to buy 850,000 tonnes of potash from Silvinit at a delivered price of $460 a tonne, analysts said, citing reports in Fertecon and FMB.
• "This is a large volume contract between a major seller and large buyer, we thus believe this will establish the market floor price and set the range for Chinese buyers," said UBS analyst Brian MacArthur, who has now placed his "buy" rating and $125 price target for Potash Corp under review.
• The price of potash -- a key crop nutrient -- has remained stubbornly high even as demand has collapsed, as a small group of companies, which account for roughly 75 percent of global supply, has drastically cut production in a bid to maintain pricing.
• However, concerns that cash-strapped Silvinit might cave on pricing arose after the price it bid in the recent Indian tender was kept confidential, while the prices bid by other major suppliers were made public.
• India typically imports between 4 million and 5 million tonnes of potash annually. The contract with Silvinit will account for just a small portion of its 2009 potash requirements, but it will put pressure on other major producers to cut prices.

Now what is interesting is Silvinit is not part of the "cartel" which generally sets the price. They appear to be a financially troubled, desperate company, but now we will see if Chindia leverages this weaker player's pricing onto the cartel!

• BPC is a 50-50 joint venture between Russia's Uralkali (URKA.MM) and Belaruskali, while Canpotex is a partnership of Potash Corp (POT), Mosaic Co (MOS) and Agrium Inc (AGU.). These five companies along with K+S (SDFG.DE) and Russia's Silvinit account for about 75 percent of global potash supply.

Some follow up stories -Reuters

• Belarussian Potash Co, a major supplier of potash to world markets, may revise its price offers after reports that rival supplier Silvinit agreed a deal with India at levels far below market expectations.
• BPC, a 50-50 joint venture between Belaruskali and Russia's Uralkali, was surprised at reports Silvinit had agreed to sell 850,000 tonnes of potash to India at a delivered price of $460 a tonne, a senior company official said. "We did not expect such a significant reduction in price," Oleg Petrov, head of sales at BPC, said in comments emailed to Reuters late on Friday.

and Bloomberg

• “With China out of the potash market due to weak demand from farmers and high stocks, India is the pricing benchmark this year,” VTB Capital analyst Elena Sakhnova said in a note.

Now here is the interesting comment, which was something I echoed Friday. If so, this would actually be quite a buying opportunity (soon) in these potash producers.

• “We would treat this more as financial problems at one of the global players rather than a crack in discipline,” she said.

So while $460 seems an overreach, there still now seems to be the thesis that prices will drop from where the potash producers were making a stand, at least in the spot market.

• The price of potash for immediate delivery will “correct sharply” to $530-560 a ton, from $735-750 a ton currently, Sakhnova said. The price reduction in India may be “a good stimulus for China to buy fresh volumes,” she said.
• Silvinit’s Epifanov said the Indian deal, a 26 percent price cut, probably signaled the bottom of the potash market and future contracts will likely be signed at higher prices.

If however, this 'distressed price' is a trend setter, then these companies have bigger issues. Note - we closed our long positions in this group and actually went short

Potash (POT) in mid $90s; unfortunatelyit appears we covered 48 hours too early. [Jul 2: Closing Potash, Mosaic - Selling Short Potash] At this point, the news should be "in" and we can expect at least an oversold bounce for a quick trade if the larger market holds on to support.

No positions

Comments

[Mentor:]

I am involved in worldwide sales of phosphatic fertilizers, what is happening to potash, has already happened to phosphatic fertilizers.
Producers agreed not to sell phosacid (basic component for phosphatic fertilizers MAP DAP TSP....) at a price under $1000, but GCT, tunisian producer broke "the cartel" and sold at a price of $600.
Now phosphatic fertilizers is starting to recover in volume and prices.
In a comment to one of your article about Potash, I said that Doyle is running great risk to keep price position of $750, I warned to watch BPC, now the surprise has come from silvinit, expect another surprise from ICL and K+S.

Jul 14 08:29 AM

[anopenmind:]

Wonder the capacity for Silvinit in delivering noted 850,000 tonnes ot potash to India during time frame of the contract with India? Is this 100% new sales volume or some % of additional supply to India? How many extra tonnes of potash and incentive does Silvinit have to sell elsewhere at $460 or even $530 to $560 range noted?

June 24, 2009 (Bloomberg) -- K+S AG, Europe’s largest producer of potash, cut its 2009 and 2010 forecast for worldwide sales of the crop nutrient as demand from farmers falls. Sales by volume will total 40 million tons this year and 50 million tons in 2010. If Silvinit's deal is for near-term full delivery, the contract = perhaps 2% max of full Y2009 demand. If Silvinit has not other extra capacity to supply at sub $600 pricing, will that 2% max result in a 25-28% world drop in pricing remainder of Y2009?

Jul 15 09:23 AM

[mplaut:]

I believe that even $460 is a good price for the potash producers. It is still way above the price only a few years ago. And they will fight to keep it higher.

Jul 15 06:09 PM