Did India Just Acquire More Leverage Against Canadian Fertilizer Companies?

GC is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Canpotex, the Canadian marketing and export firm for fertilizer producers Potash Corp (NYSE: POT), Mosaic (NYSE: MOS), and Agrium (NYSE: AGU) is likely to face even more difficult negotiations as indian farming business Gujarat State Fertilizers & Chemicals Limited (NSE:GSFC) agreed to buy roughly 20 percent of Canadian mining company Karnalyte Resources (TSE:KRN) for C$8.15 a share.

Along with the significant investment, GSFC also inked a 20 year deal in which they agreed to buy 350,000 tons of potash annually for the length of the agreement.  This would represent more than half of the plants initial production capacity of 625,000 tons per year. The agreement has provisions for annual purchases by GSFC to increase to 600,000 tons once the second of three total phases is complete. The second phase of production at the mine will increase annual production to 1.375 million tons annually.  The company estimates the mines largest annual production capacity at 2.13 million tons, which is equal to or larger than five of Potash Corp's seven production facilities, and four of Mosaics potash mines.

The Potash feasibility study estimates proven reserves of 62.9 million tons and another 92 million tons of probable potash revenues, which is also competitive with both Mosaic and Potash Corp's production facilities. Of course these company's have their own potash expansion plans under development. While it's not a huge deal, the acquisition reduces India's previous reliance on potash imports with the big three and may give them some pricing power during negotiations at a time when inventories are very high.

The recent announcement of an agreement between Canpotex and Sinofert Holdings to buy the first 1 million of a previously agreed to annual minimum requirement of 1.1 million tons for 2013 at $400 per ton was $70 lower than the previous price of $470. Additionally, during Mosaic's 2nd quarter conference call company management was reluctant to comment on how much over the annual minimum requirement Sinofert holdings was ready to buy in the second half of 2013.

Negotiations between India and Canpotex are ongoing. In my opinion this deal could send potash prices to and possibly through the low-end of Mosaic's fiscal Q3 estimate of $370 to $400 per ton. Just how much leverage this acquisition transfers from the big three to its Indian customers remains the big question.

Neither The Mays Report or GC Mays has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus