Potash (POT), Mosaic (MOS) Continue to Take a Hit on Silvinet India Deal

Potash (POT) and Mosaic (MOS) were hit hard Friday [Jul 10: Potash Steamrolled] on news that a Russina provider, Silvinet had signed an agreement with major buyer India for a steep discount, $460 a tonne. To show you the scope of that pricing all the other bidders apparently were in the $625-$635 range. Both stocks continue weak this morning, 3-4% down - interestingly Mosaic (MOS) was surging Friday ahead of this news report due to a flurry of call buying and the ever present "takeover rumor".

• India has agreed to buy 850,000 tonnes of potash from Silvinit at a delivered price of $460 a tonne, analysts said, citing reports in Fertecon and FMB.
• "This is a large volume contract between a major seller and large buyer, we thus believe this will establish the market floor price and set the range for Chinese buyers," said UBS analyst Brian MacArthur, who has now placed his "buy" rating and $125 price target for Potash Corp under review.
• The price of potash -- a key crop nutrient -- has remained stubbornly high even as demand has collapsed, as a small group of companies, which account for roughly 75 percent of global supply, has drastically cut production in a bid to maintain pricing.
• However, concerns that cash-strapped Silvinit might cave on pricing arose after the price it bid in the recent Indian tender was kept confidential, while the prices bid by other major suppliers were made public.
• India typically imports between 4 million and 5 million tonnes of potash annually. The contract with Silvinit will account for just a small portion of its 2009 potash requirements, but it will put pressure on other major producers to cut prices.

Now what is interesting is Silvinit is not part of the "cartel" which generally sets the price. They appear to be a financially troubled, desperate company but now we will see if Chindia leverages this weaker player's pricing onto the cartel!

• BPC is a 50-50 joint venture between Russia's Uralkali (URKA.MM) and Belaruskali, while Canpotex is a partnership of Potash Corp (POT), Mosaic Co (MOS) and Agrium Inc (AGU.). These five companies along with K+S (SDFG.DE) and Russia's Silvinit account for about 75 percent of global potash supply.

Some follow up stories today - Reuters

• Belarussian Potash Co, a major supplier of potash to world markets, may revise its price offers after reports that rival supplier Silvinit agreed a deal with India at levels far below market expectations.
  
• BPC, a 50-50 joint venture between Belaruskali and Russia's Uralkali, was surprised at reports Silvinit had agreed to sell 850,000 tonnes of potash to India at a delivered price of $460 a tonne, a senior company official said. "We did not expect such a significant reduction in price," Oleg Petrov, head of sales at BPC, said in comments emailed to Reuters late on Friday.

and Bloomberg

• “With China out of the potash market due to weak demand from farmers and high stocks, India is the pricing benchmark this year,” VTB Capital analyst Elena Sakhnova said in a note.
  

Now here is the interesting comment, which was something I echoed Friday. If so, this would actually be quite a buying opportunity (soon) in these potash producers.

• “We would treat this more as financial problems at one of the global players rather than a crack in discipline,” she said.

So while $460 seems an overreach there still now seems to be the thesis that prices will drop from where the potash producers were making a stand, at least in the spot market.

• The price of potash for immediate delivery will “correct sharply” to $530-560 a ton, from $735-750 a ton currently, Sakhnova said. The price reduction in India may be “a good stimulus for China to buy fresh volumes,” she said.
• Silvinit’s Epifanov said the Indian deal, a 26 percent price cut, probably signaled the bottom of the potash market and future contracts will likely be signed at higher prices.

If however, this 'distressed price' is a trend setter, than these companies have bigger issues. Note - we closed our long positions in this group and actually went short Potash (POT) in mid $90s, unfortunately it appears we covered 48 hours too early. [Jul 2: Closing Potash, Mosaic - Selling Short Potash] At this point the news should be "in" and we can expect at least an oversold bounce for a quick trade if the larger market holds on to support.

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