Sinofert (China) settles new potash import price at US$400/ton
Canpotex (the offshore marketing company for Agrium, Mosaic and PotashCorp) announced on 31 Dec 2012 that it has reached a pact with Sinofert tosell 1m tons of potash to the latter during the first half of 2013 for “US$70 perton reduction from the last contract price”. The last potash contract settlementbetween the two parties took place on 20 March 2012, during which 500k tonsof potash (+200k option) was purchased for c.US$470/ton. In FY11, Sinofertcontracted 1.23m tons of potash from Canpotex at a price of c.US$436/ton.
Timing, price and volumes broadly in line with our expectations
Overall, the timing of the contract settlement is largely in line with ourexpectations – we expected Sinofert to reach a pact with Canpotex by endJanuary (at least two weeks before the Lunar New Year starting 10 February2013). In 2012, China reduced its seaborne potash requirements through acombination of increased production, inventory withdrawals and increased raildeliveries from Russia (1.6mtpa for 10M12). The available potash inventory of2.8m domestically (November 2012) and the rate of imports (160k tons/month)flowing in from Russia into northeast China is not likely to support demand forthe upcoming spring planting (March/April), during which at least c.4m tons ofpotash will be consumed. As a result, we believed that a win-win outcome forboth China and Canpotex would have been a 1) rollover price (US$470/ton) onflat volumes or 2) lower price but with higher volumes. It is also worthwhile tonote that the new potash contract price is below the implied price (US$2bnplusor US$400-plus/ton) recently (October 2012) paid by state-ownedcompany Sichuan Chemical to Prospect Global Resources (a Denver-basedcompany) for 5m tons of potash over a ten-year period.
Implications for Sinofert
The contract potash price is crucial for Sinofert given the company generates27-56% (2007-11) of gross profits distributing the product. Potash is also seenas one of the key impetus driving Sinofert’s profitability given the oversupply/low-margin situation in phosphate and nitrogen fertilizer distribution inChina. We expect the lower 1H13 potash import prices to lift Sinofert’s potashmargins, especially when demand/prices rebound once compound fertilizerproducers step up production for the spring planting. For reference, Sinofertdelivered potash margin of 7.5% in 1H11 when the potash import price wasUS$400/ton (ASP: RMB2,795/ton); this is 2.1ppts higher than the 5.39% 2H11margin achieved when the import price was US$470/ton (ASP atRMB3,020/ton). All else equal, we estimate that a 1% increase in potashmargin will lift Sinofert’s earnings by 7-8%.