Market and product

Chinese potash buyers, whose contracts set benchmarks for the world market, will secure their lowest price in years, brokers believe, citing rates being charged in regional markets and elevated inventories.

Canada-based broker Raymond James on Wednesday cut by $15 a tonne to $260 a tonne its forecast for the price that China's buyers, the world's top importers, will pay for their potash, after the annual round of talks with major exporters.

A price at that level would be below the $315 a tonne that Chinese importers paid last year, and less than half the $575 a tonne it agreed for some contracts in 2008.

And some other commentators believe that Chinese negotiators – whose contracts set benchmarks used by other buyers worldwide - will achieve an even better deal, with weak Brazilian prices suggesting that a contract will be struck potentially at $230 a tonne, according to Moscow-based VTB Capital.

'Eerily low'

China, as the world's top potash importer, typically achieves a price below prevailing rates in other import markets, such as Brazil and South East Asia – where prices have continued to fall, dropping 9% to $250 a tonne and 4% to $278 a tonne respectively so far this year, according to Credit Suisse.

Raymond James analysts believe South East Asian prices are even lower, saying that spot transactions in the likes of Malaysia have come in below $260 a tonne, "an eerily low threshold given that South East Asia often trades at a $10-15 a tonne premium to the settled Chinese contract".

Last year, for instance, South East Asian potash was trading at $325 a tonne in the run-up to Chinese importers' agreement to pay $315 a tonne.

Chinese buyers are being given extra muscle in the negotiations with exporters by the extent of inventories still left in the country - reportedly up some 25% year on year at about 5m tonnes.

Such inventories are "providing state-owned buyers with ample flexibility/leverage in current negotiations", Raymond James analyst Steve Hansen said.

There is some talk that agreement between Canpotex, the North American potash export consortium, and China's Sinofert will be delayed until at least April.

'Tactically cautious'

Raymond James analysts made the comments as they cut to $16.00, from $23.00, their target price for New York-listed shares in PotashCorp, North America's top potash producer, and to $92, from $105, their target for stock in Agrium, its smaller rival.

"We continue to remain tactically cautious on PotashCorp and Agrium given the flurry of 'red flags' [on industry prospects] still flapping abruptly in the wind—all of which suggest a degree of caution remains warranted," Mr Hansen said.

That said, the new price forecasts remain above the levels of $15.06 and $85.89 at which the shares closed on Tuesday, implying expectations for some recovery.

Mr Hansen acknowledged that "fertilizer equity valuations have admittedly entered 'interesting' -improved risk-reward - territory alongside the sharp sell-off in recent weeks/months".