Potash Export Grip Challenged in Chinaís Bond Deal: Commodities

Yuliya Fedorinova and Maria Kolesnikova / Bloomberg (UK)

Chinaís loan to potash billionaire Suleiman Kerimov should give the country its first direct access to companies that dominate supplying the crop nutrient to the global fertilizer industry.

The China Investment Corp. sovereign wealth fund last week agreed to buy bonds from the investor and his partners that they can repay in 2014 with a 12.5 percent stake in Russiaís OAO Uralkali, the worldís largest potash producer. The deal underscored the worldwide contest for potash assets two weeks after Israeli Prime Minister Benjamin Netanyahu said Potash Corp. of Saskatchewan Inc. proposed buying Israel Chemicals Ltd. (ICL) to overtake Uralkali as the top exporter.

China imports about a fifth of global shipments of potash, valued at about $19.4 billion by Bloomberg Industries, using it to enhance crops that feed the most-populous nation. Producersí pricing power may be hurt should their biggest customer own a stake in the largest supplier, according to Bank of America Corp. analysts.

«Should CIC become a large shareholder in Uralkali, it may get on to the board and get access to sensitive contract talks," Alexei Morozov, a Moscow-based UBS AG analyst, said by phone Nov. 12. «China will be better positioned during price talks and may be able to negotiate lower contract prices, which will affect global spot prices in turn.»

China Prices

The current price for China is $470 a metric ton, including cost, insurance and freight. China should ask suppliers to cut potash import prices by 26 percent to less than $350 a ton because of weaker demand and a buildup of stocks, Wei Chengguang, president of China Potassium Salts Industrial Association, said in an Oct. 16 interview. An e-mail request for comment to CICís Beijing-based press office today wasnít answered.

Five companies account for more than two-thirds of the annual exports of potash, a potassium-based compound that strengthens plant roots and protects against drought.

Uralkali, based in Berezniki, Russia, has a trading joint venture with Belaruskali, a Belarus-based supplier, while Canpotex Ltd. sells potash produced by Potash Corp., Agrium Inc. (AGU) and Mosaic Co. (MOS) The group controlled 69 percent of global potash exports in the first half of 2012, Uralkali figures show.

«The potash industry is viewed as a cartel where suppliers benefit from a high degree of industry consolidation," Bank of America analysts said in a Nov. 12 report.

Attractive Margins

That grip on supplies has meant attractive margins for potash producers, among the most profitable mining companies. Uralkaliís average export sale price is six times the cost per ton of production, excluding freight costs, data from Uralkali show. Freight may more than double the cost per ton, according to the company.

Uralkaliís margin on earnings before income, taxes, depreciation and amortization was 64 percent in the first half. CIC might have had a lesser profit opportunity investing in OAO GMK Norilsk Nickel, Russiaís largest mining company, whose Ebitda margin was 42 percent in the period, or BHP Billiton Ltd. (BHP), which had a 53 percent rate in the last fiscal year.

«CIC is an investment fund, set up to increase yields," Uralkaliís Chief Executive Officer Vladislav Baumgertner said in e-mailed comments yesterday. «Thus it should be interested in Uralkaliís profit increase and in growing potash prices in all markets." The transaction between Kerimov, his partners and CIC doesnít impose any commercial obligations on Uralkali, he said.

Sinochem Approach

CIC International didnít give details of its plans for the bonds or the potential 12.5 percent stake in Uralkali in a statement on Nov. 9 on its website announcing the transaction.

China has been seeking an opportunity to invest in potash makers since at least 2009, when Sinochem Group made an offer for Nufarm Ltd. (NUF), Australiaís biggest supplier of farm chemicals, for a possible takeover.
State-owned Sinochem was the most likely potential counter bidder to BHP Billiton Ltd.ís $40 billion approach for Potash Corp. in 2010, people familiar with the matter said at the time.

CICís investment in Uralkali «signifies the importance of potash to China," Daniel Yakub, a Citigroup Inc. analyst in Moscow, wrote in a note on Nov. 9. CIC may buy additional shares in Uralkali in the market, said Konstantin Yuminov, an analyst at Raiffeisen Bank.

A possible Potash Corp. deal with Israelís ICL and CICís investment in Uralkali arenít the only ownership changes to the global potash oligopoly that investors are weighing.

President Lukashenko

Belarus may sell as much as 20 percent of Belaruskali, which produces about 15 percent of worldís potash, Belta news agency reported Nov. 12, citing President Aleksandr Lukashenko. Last year Lukashenko named China as one of the possible bidders for the potash producer.

The Uralkali-CIC transaction shifts the balance of power between buyers and the suppliers and puts pressures on other producers, Jason Miner, a Princeton, New Jersey-based analyst at Bloomberg Industries, said Nov. 12. «This potentially gives China more insight into the cost position of all producers, which is really what shifts the balance," he said.

Uralkali depositary receipts fell as much as 1.7 percent in London today, valuing the company at $21.8 billion. Potash Corp. slid as much as 1.2 percent to $37.54 in Toronto.

Stockpiles of potash rose 11 percent from December through the end of August to 4 million tons, undermining efforts by Uralkali, Potash Corp. and other producers to renew contracts with buyers in China.

China Factor

«China is now a key factor in defining the global potash price for 2013," Raiffeisen Bankís Yuminov said. Any decline from the current $470 per ton will lead to a drop in spot prices, he said.

Uralkali reduced third-quarter output by 700,000 tons from planned volumes because of an «unfavorable situation» in markets including China and India, it said last month.

K+S AG (SDF), Europeís largest potash maker, said Nov. 13 it expects 2012 sales and profit to be at the low end of its targeted range as delays in Chinese and Indian contracts restrain market prices for the crop nutrient.

China is «very determined» to pay less than the $470 ton it negotiated for the first six months of 2012, Mosaic CEO Jim Prokopanko said Oct. 2. Bank of America set 2013 contract potash price targets for China at $420 per ton, according to Nov. 12 report, at the same time cutting its recommendation on Uralkali stock from buy to neutral.

Spot potash prices for the North American market fell 7 percent from January to $664.70 a ton, data compiled by Bloomberg show.

Little Threat

Still, CICís investment in Uralkali may pose little threat to the potash market, according to Fertecon Ltd., a Tunbridge Wells, England-based industry consulting company whose clients have included ConAgra Foods Inc. (CAG), Goldman Sachs Group Inc. and Exxon Mobil Corp.

«It is essentially a financial investment rather than a strategic investment to have influence on the potash market," Barrie Bain, director of Fertecon, said by e-mail Nov. 12.

The Chinese fund should be interested in seeing Urakaliís market capitalization grow, because it needs to exchange bonds into stock, rather than merely achieve a relatively small yield, Yuminov said.

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