Analyst sees mid-term potash price at $400-$500/t

3rd September 2010

By: Matthew Hill


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BARRIE ( - As rumours swirl surrounding potential Chinese plays for Potash Corp, Stifel Nicolaus analyst Horst Hueniken says prices for the fertiliser it produces will likely trade between $400/t and $500/t in the medium term.

This week, Russian producers and Canadian potash cartel Canpotex raised their prices for potash delivered to South East Asia to $405/t, from the previous levels of $375-390/t.

“Demand has been running strong in all markets, apart from China. That increase in demand is what is leading people to think that total shipments for this year will be between 45-million tons and 50-million tons,” Hueniken said in an interview.

“The outlook in 2011 is that the rate of production will continue to climb that it will be at least 50-million tons next year and in 2012 that will grow to perhaps 55-million tons.”

Estimates are global potash shipments will be between 45-million tons and 50-million tons this year, a marked improvement from the roughly 30-million the industry shipped last year. In 2008, shipments were around 55-million tons.

According to Hueniken, the potash industry was currently producing at around 82% of capacity. Potash Corp – the biggest source of the fertiliser globally – is a swing producer, meaning it ramps up capacity according to demand, which helps to keep prices higher.

If BHP Billiton were successful in acquiring the company, this might change after Potash Corp’s contracts with Canpotex expired in 2012.

BHP Billiton’s strategy has been to run its mines “flat out and let price be dictated by the high cost producer”, Hueniken said. It might follow this approach with Potash Corp.

If this was the case, it would prevent the price of potash from rising too high, as there would be plenty of supply on the market.

“It could well be that they [BHP Billiton] are actually thinking of a price very close to today’s price in the long term,” commented Hueniken.

“We are not in the situation where we have a supply crunch.”

A key factor on the demand side was the biggest consumer, China, which had been running down inventory levels this year, keeping global demand low. Hueniken said anecdotal evidence suggested that Chinese inventory levels were now low, and demand would start to increase over the next two to three months.

“They’ve had poor yields, and there’s more pressure from Beijing  to have bigger crop next year,” he noted.

“They’re very conscious about making sure there’s enough food. A sign that things are not as comfortable as in the past is that, for the first time in four years, they imported corn from the US this year.”

What does this mean for the current BHP Billiton offer for Potash Corp?

If a bid were to succeed, BHP Billiton might put a cap on potash prices at around $500/t from maximising production.

But the fact that Potash Corp’s shares are still trading around the $147 mark, compared with the $130 offered by BHP Billiton, shows investors aren’t likely to oblige what’s on the table.

Since Potash Corp made BHP’s bid public, more than half of the company’s shares have changed hands at prices significantly higher than what’s on offer from BHP. This means a lot of people would lose money if they tendered their stock to BHP’s current offer.

Reuters reported on Friday that Beijing had instructed Chinese state-owned firms to “explore ways to block BHP Billiton's $39-billion bid”, quoting two sources that a consortium would more likely buy a blocking stake than the whole of Potash Corp.

Edited by Liezel Hill



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