Chinese Potash Contracts Give Market Hope

By James Wellstead — Exclusive to Potash Investing News

Chinese Potash Contracts Give Market Hope

China's activity in the potash sector has brought mixed reactions to the potash market in early 2012. But with the first week of spring upon the northern hemisphere, the promise of record grain prices has kept sentiments high as farmers begin entering the market.

For the past few weeks, China has been attempting to shake off a looming correction within its manufacturing-based, commodity-starved economy. But it appears that it might already be too late.

Last week, the Economist reported that China's industrial production grew by 11.4 percent in January and February compared with the same two months in 2010, much slower than its normal pace of about 15 percent. Even worse, the production slowdown has translated into a slowdown in exports, creating a trade deficit of US $31.5 billion in February, and spelling near doom and gloom for many China watchers.

What's worse is that the Chinese appear to be investing - rather than consuming - in their own markets, which has driven fears of possible asset inflation alongside rising food prices. Striking a balance between much-needed economic stimulus and inflated prices appears to be a real challenge for the world's second-largest economy.

Scotiabank Vice President and commodity market specialist Patricia Mohr suggested that China's central bank should loosen monetary policy to spark the economy to life. But, if not properly directed to slumping sectors, inflated price levels, a product of monetary easing, could make life difficult for the Chinese, who are already facing record corn, soybean, pork, and poultry prices.

The impact has been felt directly within the potash market. Dim forecasts from China and Europe were primarily responsible for Uralkali's recent  projection that its fertilizer business will dip in 2012, down to 10.5 MT from 10.8 MT in 2011, on lower demand.

PotashCorp (TSX: POT) and Mosaic (NYSE: MOS) also remain pessimistic about the short-term shape of the market, and have lowered their production levels twice this year.

But despite the pessimistic sentiment in the market, China's recent potash transactions have surprised many.