India’s quest to reduce its fertilizer subsidy in the near term may get a boost from a very unlikely quarter: A corporate tussle in the global potash industry is likely to result in a substantial slump in international potash prices.
Further, over the medium to long term, pressure on prices could boost domestic consumption of potash and reduce the excessive use of low-priced urea, thereby, ensuring more balanced fertilizer application.
Highly cartelised international potash market was shaken up in July after Russian producer Uralkali abruptly announced that, with immediate effect, it would stop exports through Belarusian Potash Company (BPC) and would, instead, henceforth direct all its exports through Switzerland-based Uralkali Trading. Belarus and Russia have together had a strong grip on the world potash market since 2005 when BPC was established. BPC is one of the two top global marketing alliances for potash (owned 50 per cent by Uralkali, 45 per cent by Belaruskali, and 5 per cent by Belarusian Railways), the other being a group of North American producers. Together, Belarus, Russia and Canada dominate global potash production, and account for about 75 per cent of global trade.
Decline in prices
In August, a month after the breakup, potash prices declined by about 10 per cent m-o-m to $370-380 a tonne.
Moreover, Uralkali said that it would operate at 100 per cent of capacity, increasing its potash production by 3.5 million tonnes by 2014 (6 per cent of global production in 2012) from 9.4 million tonnes in 2012, which will ultimately lead to excess supply in the global market. This is expected to sharply pull down potash prices to about $300 a tonne by 2014-15, far below last year’s average price of $485 a tonne.
Uralkali’s decision will have a radical impact on the global potash market, and focus will now shift to more fundamental factors such as the demand-supply balance for determining the prices. Till recently, the two major alliances have followed a ‘price over volume’ strategy wherein they have adjusted production levels to ensure high prices. As a result, potash prices have increased at a 15 per cent CAGR (compound annual growth rate) between 2005-06 and 2012-13. On the other hand, prices of fertilizers like di-ammonium phosphate (DAP) and urea increased at a CAGR of 11 per cent and 8 per cent, respectively, during the same period.
However, Uralkali acknowledged that the ‘price over volume’ strategy had reduced its share in key markets such as Brazil. Further, Uralkali wants to increase its presence in the key markets of India and China.
Immediately after break-up with BPC, Uralkali Trading has already reached a pact with a Chinese importer CNAMPC on the delivery of an optional volume of potash — 500,000 tonnes — covering the remainder of 2013.
The market price of the contract is expected to be about $350 a tonne cfr (cost and freight), as compared to the first half 2013 seaborne contract price to China of $400 a tonne cfr. Uralkali is also in talks with Indian buyers.
One fallout of Uralkali’s decision in the near term may be seen among those Indian buyers who settled contracts at $427 a tonne cfr, right through to the start of next year (first quarter of 2014). These customers may make efforts to renegotiate prices and, given the market scenario following Uralkali’s sudden exit from BPC, they may well succeed where they had failed in 2011.
Breakeup of cartel
For major consumers such as India, the breakup of the cartel will mean a significant reduction in landed cost of potash imports. India imports 100 per cent of its potash requirements, which entailed a subsidy bill of Rs.4,800 crore in 2012-13. The landed cost of potash imports is expected to decline to Rs.22,500 a tonne in 2014-15 from Rs.30,000 a tonne in 2012-13. The savings of Rs.7,500 a tonne will be used by the government to partly offset its subsidy burden. Some cushion will also be provided to domestic fertilizer manufacturers to reduce retail fertilizer prices to boost demand. Consequently, the subsidy on potash is expected to decline by Rs.900-1,000 crore and retail prices are expected to decline by about 10 per cent in 2014-15 as compared to 2012-13.
In the long term, this development will not only result in savings for the government but could also lead to an increase in domestic potash consumption, and reverse the recent trend of lower consumption due to rising potash prices.
The author is Director, Crisil Research, a division of Crisil