- The U.S. and the European Union have imposed financial sanctions on Russia due to the ongoing Russia-Ukraine conflict.
- Russia is protecting its economy by increasing bilateral trade with India and China. Russia and India are developing systems to trade in national currencies.
- If the political climate worsens, then Uralkali could increase its exports to India and China by slashing potash prices, which could affect Canpotex potash sales.
In the last few months, the Russia-Ukraine conflict has intensified. The U.S. and the European Union (or EU) have imposed financial sanctions on Russia and a few Russian individuals. Russia is trying to protect its economy by increasing bilateral trade with India and China.
Russia widening bilateral trade
The bilateral trade between Russia and India is expected to increase from $11 billion in 2012 to $20 billion in 2015. Both countries have planned to form a group to develop mechanisms for the use of national currencies in mutual settlements by September 2014. The goal of the new group is to develop a regulatory environment for settlements in national currencies. I have discussed in my article, "The Outlook for the Indian Rupee", about the downward trend of the Indian Rupee (or INR). The Indian government will prefer to trade with Russia using the INR, as it will help the country to conserve its limited foreign exchange reserves.
Russia is also increasing its partnership with China. The two countries aim to boost bilateral trade to $100 billion by 2015. According to the Moscow Exchange, trading of the Chinese yuan versus the Russian ruble rose to the highest on July 31, 2014 since the end of 2010.
The impact on potash industry
In April 2014, the U.S. imposed travel and asset controls on Uralkali (OTC:URALL) Chairman Sergey Chemezov. The company pays 175 basis points above the Libor on its $450 million loan raised in June 2014.
Uralkali expects global potash deliveries to reach 60 million tonnes (or Mt) in 2015, up 2 Mt from 2014. China and India constitute 37% of Uralkali's total sales, while the U.S. and Europe constitute only 16% of its sales. Uralkali transacts in U.S. dollars (or USD) but it can switch to other currencies. In May 2014, Victor Belyakov, chief financial officer, Uralkali, said:
"Up till now we have not seen any risks associated with transactions in dollars. But we can easily switch to local currencies for trading in developing countries."
Currently, Uralkali has a contract to ship 0.8 Mt of potash to India at $322 per tonne till March 2015. Canpotex, owned by Potash Corporation (NYSE:POT), Agrium Inc. (NYSE:AGU), and The Mosaic Company (NYSE:MOS), has an annual contract to export 1 Mt of potash to India till March 2015 at the same price. There is a possibility that India could increase potash imports from Uralkali in the next fiscal year (or FY) 2015/16 (April 2015 to March 2016) to conserve its foreign exchange reserves.
In January 2014, Chinese buyers signed a contract to import 0.7 Mt of potash from Uralkali at $305 per tonne for first half of 2014. At the same time, Canpotex signed a contract to supply 0.7 Mt of potash to China for the same period at an undisclosed price. Uralkali plans to increase the price for a new supply contract with China by 10%. The new contract negotiations are expected to start this autumn and end by January 2015.
A lot depends on the political climate in the next few months. There is a possibility that the U.S. and the EU may impose trade restrictions on few Russian companies including Uralkali. In such a scenario, Uralkali could increase potash exports to India and China by slashing prices as its production cost is $62 per tonne. India and China could reduce their imports from Canpotex to maintain trade relations with Russia. In Q2 2014, China and India accounted for 23% of Canpotex's potash shipments. This move will affect potash sales of Canpotex.
I would conclude by saying that the Russia-Ukraine conflict is unlikely to get resolved in the near term. If there are more sanctions on Russia, then Uralkali may change its export strategy which will change the dynamics of the potash industry.
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