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One of the members of the global potash club just broke rank in terms of price, making things a tad more interesting.
In my fourth-quarter review of PotashCorp (NYSE: POT ) , I noted that the company was firmly holding the line on pricing for its namesake product. This appeared to be the right approach, in light of the lack of demand in response to price cuts by Mosaic (NYSE: MOS ) and Terra Industries (NYSE: TRA ) in other fertilizer product groups.
The offending oligopolist today is none other than Belarusian Potash Corp. (BPC), the Eastern European export collective that rivals the Canpotex crew of PotashCorp, Agrium (NYSE: AGU ) , and Mosaic in stature. Last year, around the time of Intrepid Potash's (NYSE: IPI ) debut, BPC jacked up its export rate to $1,000 per metric ton. Now the company has made a concession to Brazil in the form of a 25% price reduction.
This seems like a pretty reasonable step, given the dislocations in Brazil's agricultural sector noted in this article. The potash exporters will still earn a high gross margin at that price, and more buyers ought to come out of the woodwork.
Still, PotashCorp and Agrium are likely not too pleased with the precedent, given that negotiations with China are under way. Unlike Brazil, which is a spot market, Chinese buyers agree to an annual rate, so the Canadians would be loathe to leave money on the table in case there's a back-half recovery this year.
Goldman Sachs (NYSE: GS ) , for one, clearly identified the price concession as a negative for PotashCorp in a note to clients. Merrill Lynch analysts, meanwhile, appear to have had lower expectations for exporter netbacks (a concept analogous to producer gross margin), and took this news in stride. They also expect North American potash prices to soften near-term, for those keeping score.
Brazil was kind of a curveball, but the rates to watch remain the forthcoming Chinese and Indian long-term contracts. Even if these rates roll over flat from 2008 -- another of Merrill's assumptions -- that still leaves potash producers like Mosaic in a comfortable position. It would take a drastic concession to get me concerned about this prized product's profitability.
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