Potash demand destruction likely in India, after gov't hints at subsidy cut

Bad news for the world's major potash producers already struggling with weak prices

Already reeling from decades-low prices, potash miners are staring at another headwind, this time from India, a major importer of the crop fertilizer ingredient.

The news out of India today is highlighting a proposal by the Indian government to cut the potash subsidy by 17% in order reduce fiscal debt. Doing so, however, would have the effect of raising the prices paid by companies that import it; India relies on imports to meet its roughly 4 million tonnes of potash demand annually. That in turn would lead to a reduction in Indian demand, which would affect producer companies like Uralkali, Potash Corp, Agrium Inc, Mosaic, K+S, Arab Potash and Israel Chemicals.

"The subsidy reduction will weigh on the new contract negotiations. We cannot offer higher prices in new contracts due to the proposed subsidy reduction": Indian government official 

Such companies had been hoping for an uptick in demand to counter lagging prices, which are hovering just above $200 a tonne – over half of what the market was offering five years ago.

For instance Potash Corp (TSX, NYSE:POT) – the world's biggest fertilizer producer – recently reported its profit is down by 70% on weak prices, but sounded an upbeat note on better expected demand:

“With increased demand and limited new capacity additions, we anticipate relatively balanced market fundamentals in 2017,” it said in an end-of-January statement.

Similarly, Mosaic’s (NYSE:MOS) Colonsay potash mine in Saskatchewan is re-opening based on rosier predictions for potash.

Reuters reports that India's fertilizer ministry has proposed fixing the potash subsidy at 7,669 rupees ($114.61) a tonne for the 2017-18 fiscal year beginning in April, down from 9,280 rupees per tonne this year. Doing so would save the government almost $100 million based on 4 million tonnes of imported product.

"The subsidy reduction will weigh on the new contract negotiations. We cannot offer higher prices in new contracts due to the proposed subsidy reduction," Reuters quoted a government official who negotiates with overseas miners.

The proposal still has to passed by the Indian Cabinet headed by Prime Minister Narendra Modi. Contracts signed by India and China are considered global benchmarks.