July 10, 2009 / 5:52 PM / in 9 years

UPDATE 2-India-Silvinit deal hits potash producers' shares

* Silvinit-India contract prices well below expectations

* Expected to set tone for further key India, China deals

* Potash Corp shares down 9.2 pct, Agrium, Mosaic fall (Adds Silvinit comment, details; updates shares; in U.S. dollars unless noted)

By Euan Rocha

TORONTO, July 10 (Reuters) - Shares of Potash Corp POT.TO and its peers fell sharply on Friday after fertilizer trade publications reported that India has settled some of its 2009 potash contract order with Russian producer Silvinit SILV.RTS at a price sharply below market expectations.

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 well below the $625 to $635 per tonne range that all other major producers had proposed.

“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.

“If Silvinit has indeed contracted with India at $460 (per tonne) delivered, other producers (BPC, Canpotex) must now decide what to do with their own offer prices,” said Morgan Stanley analyst Vincent Andrews.

Silvinit has not issued any official comment on the reported contract pricing. A spokesman for Silvinit told Reuters that the company does not publicly discuss its pricing and marketing policies.

Analysts are optimistic that the settlement of this contract price with Silvinit will lead to a thaw in global potash markets, which have remained frozen as buyers waited for India and China to ink contracts.

China is the world’s largest potash buyer and the global price setter. It typically negotiates annual contracts with Belarussian Potash Co (BPC) and Canpotex — global spot prices usually reset at above the Chinese contract price.

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

Shares of Potash Corp fell 9.2 percent to $84.90 on the New York Stock Exchange on Friday afternoon, while those of its peers Agrium and Mosaic Co were down 4.8 percent and 4.4 percent respectively.

Uralkali’s shares closed down 5.2 percent on the London Stock Exchange, while those of K+S closed down 1.9 percent in Germany. (Reporting by Euan Rocha; editing by Rob Wilson)

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