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China & India cause of "Fertilizer demand (Potash Stockpiles Shrink)

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North American Potash Stockpiles Shrink
By Gold Investor, on February 19th, 2011
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Mounting fertilizer demand for the upcoming spring planting season has North American potash inventories in decline. According to information released this week by Saskatoon-based Potash Corp. of Saskatchewan (POT:TSX), the world’s largest potash producer, potash stockpiles held by North American potash producers declined by almost 85,000 tonnes to 1.9 million tonnes in January, and are now about 24% under the five-year average. Stocks were 14% under the five-year average in December.

The news lifted potash and other fertilizer stocks, most of which have seen significant growth over the past few months. Major potash firms are currently scrambling to improve their positions in a sector expected to enjoy consistently growing demand for the next several years.

With stockpiles in decline, producers are expected to increase potash prices in key overseas markets such as China and India. Potash currently trades at just under US$400 a tonne, but India—a leading importer and consumer of potash expected to import more than five million tonnes of potash in 2011—is now unlikely to negotiate a price under $400 for the coming year.

In mid-January, Chinese firms CNAMPGC and Sinchem contracted Russian producers Uralkali and BPC (Belarusan Potash Company) to deliver 600,000 tonnes of potash at $400 per ton, an increase of 14% from the same period in 2010. At the time analysts believed this was a good strategic move by China, and the new data confirms that China was wise to lock in $400/tonne for the first six months of 2011.

Indian and Chinese potash contracts are considered a benchmark for spot potash prices, which are generally fixed slightly above the amounts negotiated by these major buyers. India is expected to ink this year’s potash contracts in early spring.

Although potash producers are eager to increase prices, this year they will be careful to prevent an astronomical price spike such as the one in mid-2008 that quickly discouraged buyers and brought the price of potash market crashing down. Producers intend to keep price increases under control, ensuring that farmers can still earn healthy profits and will not be shocked into halting purchases.

Potash, otherwise known as potassium chloride, is a naturally-occurring salt found in ancient sea beds such as the Saskatchewan potash basin. It is primarily used in fertilizers, as it fortifies plants against disease and significantly increases both crop quality and yield. It also has industrial applications.