Viewpoint: China key to finding an Asia MOP price floor

The absence of an annual contract agreement in China is undermining the possibility of a MOP spot price floor being established in Asia-Pacific after several months of weakness.

Without it there is no credible price benchmark that spot sales can be pegged against, with the price slide that first started in January 2019 continuing.

China is the world's largest MOP contract buyer, traditionally purchasing 5mn-7mn t/yr through seaborne agreements. Because of the nature and scale of this buying it is considered to produce the leading industry price benchmark.

Belarusian marketer BPC agreed the first Chinese MOP supply contract of the previous 2018-19 term in September 2018 at a headline price of $290/t cfr, a $60/t increase. It ran until the end of June 2019 and other suppliers followed agreeing similar terms.

China contract talks are often lengthy, but traditionally start towards the end of the current term with signs of progress in the following period. This year has been different, with a new contract still looking no closer at the end of 2019 to being agreed than it did back in June.

Lack of Chinese pull factor

The primary reason there has been no contract agreement yet is because China does not need to import more MOP.

It has its own substantial MOP capacity, so is not solely reliant on imports like other key Asian buyers like India, Indonesia and Malaysia. It also takes in 1mn-2 mnt/yr of MOP via rail from Russia, agreed outside of the annual seaborne contracts.

Domestic demand has been weak this year amid reduced agricultural consumption, in which African Swine Fever played its part by cutting consumption of fertilizers for feed crops. Restricted cash-flow among farmers has also contributed, while a weaker performance from the downstream NPK industry has compounded the lower consumption.

Abundant late shipments under last year's contracts along the weak domestic offtake have seen Chinese MOP port stocks maintained in excess of 3mn t for the past six months, hitting a record high 3.7mn t in December 2019.

International suppliers have shipped significant cargoes to Chinese warehouses in anticipation of the next contract agreement, again adding to the perception of ample supply availability for China when it is needed.

Weakness elsewhere a disincentive

Consumption across southeast Asia — a key MOP spot buying region — has fallen because of bad weather, poor crop prices and weaker cash flow among farmers and growers.

Indonesia and Malaysia are two of Asia's leading spot buyer markets but January-September imports were 12pc and 29pc respectively behind the same period last year. Thai imports during January-October were 18pc behind the previous year.

Southeast Asia spot prices have followed the consumption weakness, falling by 7-10pc over the past six months.

India's IPL agreed back in October the first 2019-20 contract at $280/t cfr including 180 days' credit for delivery through to March 2020. But the limited volume agreed, of only around 1.3mn t, and the shorter six-month delivery period has done nothing to reverse the soft regional market. Market participants expect India to target another cut in shipments from April onwards.

Production cut as consumption rises

The early signs from the current round of plantation buyers in Indonesia and Malaysia is that volume requests for delivery during the first half of 2020 are up compared with 2019.

Rising crude palm oil values amid higher Indonesian domestic demand support this. But in other regional markets there is a view that 2020 will see some deferred fertilizer demand re-emerging and stocks rebuilt.

The key producers of MOP have also all cut output in response to flagging global demand, which should shore up prices in the medium term as supply and demand rebalances.

But with record high stocks of MOP at Chinese ports, the question is when will the Chinese consortium step in to buy?

Chinese domestic demand is currently weak and MOP prices have been falling. Consumption for the winter season has been limited and the outlook for spring has been less than positive.

Until the heavy port stocks are worked down, there is unlikely to be any great urgency to agree on further imports.

As a result, the downwards spot price trend in Asia will continue into 2020 and may only find genuine stability once China settles, whenever that is.

By Carl Roache