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Despite recent concerns around the health of the Chinese economy, recent potash contracts from China have given hope for investors banking on rising food and crop prices.
By James Wellstead — Exclusive to Potash Investing News
China’s activity in the potash sector has brought mixed reactions to the potash market in early 2012. But with the first week of spring upon the northern hemisphere, the promise of record grain prices has kept sentiments high as farmers begin entering the market.
For the past few weeks, China has been attempting to shake off a looming correction within its manufacturing-based, commodity-starved economy. But it appears that it might already be too late.
Last week, the Economist reported that China’s industrial production grew by 11.4 percent in January and February compared with the same two months in 2010, much slower than its normal pace of about 15 percent. Even worse, the production slowdown has translated into a slowdown in exports, creating a trade deficit of US $31.5 billion in February, and spelling near doom and gloom for many China watchers.
What’s worse is that the Chinese appear to be investing – rather than consuming – in their own markets, which has driven fears of possible asset inflation alongside rising food prices. Striking a balance between much-needed economic stimulus and inflated prices appears to be a real challenge for the world’s second-largest economy.
Scotiabank Vice President and commodity market specialist Patricia Mohr suggested that China’s central bank should loosen monetary policy to spark the economy to life. But, if not properly directed to slumping sectors, inflated price levels, a product of monetary easing, could make life difficult for the Chinese, who are already facing record corn, soybean, pork, and poultry prices.
The impact has been felt directly within the potash market. Dim forecasts from China and Europe were primarily responsible for Uralkali‘s recent projection that its fertilizer business will dip in 2012, down to 10.5 MT from 10.8 MT in 2011, on lower demand.
PotashCorp (TSX:POT) and Mosaic (NYSE:MOS) also remain pessimistic about the short-term shape of the market, and have lowered their production levels twice this year.
But despite the pessimistic sentiment in the market, China’s recent potash transactions have surprised many.
Company news
On Tuesday of this week, China’s Sinofert Holdings Ltd. (HKG:0297) secured second-quarter potash delivery from Canpotex, the export marketing arm of PotashCorp, Mosaic, and Agrium (TSX:AGU). Canpotex agreed to supply the Chinese fertilizer maker with 500,000 tonnes of potash in the second quarter of this year, with an option for an additional 200,000 tonnes in the same period.
On the same day, Belarusian Potash Company (BPC), a joint venture between Uralkali and Belaruskali, inked a deal with Sinochem and CNAMPGC, China’s biggest importers of mineral fertilizers, to supply up to 500,000 tonnes in the second quarter of 2012.
The prices of both deals were unchanged from second quarter purchases in 2011, at about US $470 a tonne, a small discount off of current spot market prices, which are hovering around the US $500/tonne level.
On the whole, these deals have given a glimmer of hope to investors who are banking on stronger potash prices and profits for potash producers.
BPC sees the deal as an indication of where global potash markets are likely to head this year. CEO Valery Ivanov noted that despite some uncertainty, “macroeconomic risks are decreasing” globally, while “buying activity is picking up in key markets.”
Germany’s K+S Group (FWB:SDF), the world’s largest salt miner and the fourth-largest company in the potash market, has also suggested that 2012 should be a strong year for fertilizer markets as high crop prices are giving farmers an incentive to make significant purchase orders.
Norbert Steiner, Chairman of the Board of Executive Directors, said last week that “[d]espite all the macroeconomic uncertainties… the current pricing level for agricultural raw materials offers attractive income prospects for farmers and should therefore lead to a positive development in fertilizers demand in those sales regions of relevance for us.”
Junior mining news
Allana Potash Corp. (TSXV:AAA) announced that it intersected two zones of strong potash mineralization southeast of its Musley Deposit in Ethiopia. The press release reported that “[h]ole 34 intersected 3 metres of 38.4% KCl in the Sylvinite Zone and 7.9 metres of 22.9% KCl in the Kainitite Zone” alongside other strong results from holes 32 and 33.
Reporting on the results, Allana Potash President and CEO Farhad Abasov said, “Allana continues to be pleased with the continuity and strength of potash mineralization in the western portion of the property,” and “management believes [these results] will allow Allana to upgrade mineral resources from inferred to measured and Indicated categories as well as add to the Indicated and Inferred mineral resource categories.”
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.