China signs deal to buy Sask. potash at discount

Three North American potash producers have struck a six-month agreement to supply the crop nutrient to a subsidiary of China’s Sinofert Holdings — but at a steep discount of US$70 per tonne from the last contract price.

Shares of the three potash companies — PotashCorp, Mosaic and Agrium — rose in Monday morning trading, even though the discount was larger than some analysts were expecting. The sales are expected to help reduce a massive potash stockpile from the companies’ mines in Saskatchewan.

Canpotex Ltd., the offshore sales agency for the three companies, said Monday it would supply Sinofert Fertilizer Macao Commercial Offshore Ltd. with one million tonnes of potash for the first half of 2013.

In its brief statement, Canpotex released the size of the discount but not the price itself.

However, the previous contract price, established in March, was believed to be $470 per tonne. That would mean the new contract represents a 15 percent discount to supply Sinofert at $400 per tonne (all figures US$).

"It looks to be a tradeoff between price and volume," said Raymond James analyst Steve Hansen. "Canpotex prefers price first. I was surprised by the magnitude of the cut, but it’s a large volume commitment."

The price, while much lower than an expected $427 per tonne, should help spur a recovery in demand, said Scotiabank analyst Ben Isaacson.

New supply deals with China and India, the world’s two biggest potash consumers, were expected by late summer. However, ample supplies in China and a decreased Indian government subsidy of farmers’ purchases of the fertilizer delayed the contracts.

North American potash supplies in November were 58 per cent above the five-year average. Saskatoon-based PotashCorp, the world’s biggest potash producer by capacity, has temporarily shut down four of its Canadian mines to support prices.

A deal with China will provide a much-needed buyer for the crop nutrient, but Chinese and Indian buyers typically pay the lowest prices in the global market. The contracts are closely watched, as international spot market prices are usually pegged at a premium to the contracts.

Sinofert’s lower price still leaves the potash producers with healthy profit margins, said Ernie Lalonde, senior vice-president of mining for DBRS Ltd., which rates the debt of companies such as PotashCorp.

A deal between Canpotex and Indian buyers is expected sometime in the first quarter of 2013.

"The (China) deal should act as a catalyst to get India moving to a deal and perhaps more importantly unfreeze the other international markets that have been sitting on the sidelines waiting for an agreement," said Paradigm Capital analyst Spencer Churchill.

The deal should also hasten talks between China and Canpotex’s chief rival, Belarusian Potash Co., which sells the crop nutrient on behalf of Uralkali OAO and Belaruskali, Hansen said.

Uralkali has said it expects negotiations on a contract with China to begin in February.

— Rod Nickel writes for Reuters from Winnipeg.

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