Investment

Buyers anxious over potential pricing change

By James Regan and Tracy Zheng (China Daily)
Updated: 2010-08-26 15:15

SYDNEY - While BHP Billiton is likely to ditch a potash cartel for market-based pricing if it wins control of Potash Corp, some China-based buyers worry the changes will be to their detriment.

Talk of a Chinese white knight to counter the Australian miner's $39 billion bid show the country fears a concentration of pricing power in the big miner more than the current Russian-Canadian marketing cartel.

"As one of the biggest importers of potash, China does not want to see more concentration in this market. The same could apply to India which relies on imports for 100 percent of its potash consumption," said Emilien Mazo, an analyst with Louis Dreyfus Commodities.

These two countries may have good reasons to worry about such a deal, he said.

Potash buyers currently face a duopoly dominated by two companies: Canpotex, an export organization owned by Potash and two smaller producers, Agrium Inc and Mosaic Co; and Belarusion Potash Co (BPC), which sells material produced in Russia and Belarus.

Collectively, Canpotex and BPC control 70 percent of global potash exports, in the same way Brazil's Vale, and BHP and Rio control around two-thirds of the seaborne iron ore business.

While some buyers welcome the idea that shaking up this cozy cartel could lower prices, China's fertilizer users aren't convinced.

"If BHP...buys Potash Corp, it will make the pricing system worse for consumers," an official with a Chinese compound fertilizer maker said.

He added his company would also not be happy if China's Sinochem bought Potash, as the State-owned company was involved throughout the entire industry chain and therefore a competitor.

Chinese government officials were not available for comment.

An official at the China Inorganic Salts Industry Association, a non-government group covering the potash fertilizer industry, said the association could not comment on the issue until industry representatives met to agree on their position.

It must seem like deja vu to China after it struggled to stop BHP gaining control of Rio Tinto and almost half its supply of imported iron ore, then got into a bruising battle with the company over the pricing of the steel-making raw material.

"The potash market is a little like iron ore. The Chinese want bargaining power. In a free market they worry their influence will be diluted versus the situation now where they and one or two others set the price from the buyers' side," a Shanghai-based commodities trader said.

"You also have to remember that from the Chinese perspective, they have had a difficult experience with BHP over the years - the shift in iron ore pricing and the loss of price participation in copper concentrate deals," he added.

But the breakup of the Canadian-Russian potash cartel and market pricing may win favor with other buyers and with regulators.

"We think it would be a good thing if BHP went to market pricing," said Ian Ballantyne, chief executive of Canegrowers Association of Australia, whose members use more potash than any other fertilizer.

'We have seen an escalation in the price of fertilizers, particularly potash, brought about for no other reason than there is a cartel in place," he said.

"Fertilizer demand and fertilizer supply has been in our view manipulated by a range of parties for some time," Ballantyne added.

Reuters