By Richard Keller, AgProfessional editor
Bids to buy PotashCorp have some in the fertilizer industry worried and others in agriculture enthusiastic that purchase of the company could break the hold Canpotex Ltd. has on potash prices around the world.
Canpotex is owned by three fertilizer companies that have large Saskatchewan, Canada-based mining operations and operate as a cartel in negotiating prices together overseas. Canpotex exists because of a Canadian-government exemption to its competition law that allows PotashCorp, Agrium Inc. and Mosaic Company to coordinate sales worldwide outside of Canada and the United States.
BHP Billiton made an offer to buy PotashCorp, and the worry in Canada was that the change in ownership could result in a breakup of Canpotex, and would likely have negative impact on Saskatchewan's economy. PotashCorp reportedly is responsible for more than 50 percent of the Canpotex sales volume.
Saskatchewan is home to an estimated 53 percent of the world's total known potash deposits; therefore, income to Saskatchewan fluctuates dramatically when potash prices rise or fall. The Canpotex strategy of potash sales around the world has had the effect of dampening any decline in potash prices, according to business observers.
A successful bid by BHP for PotashCorp would have broken Canpotex, according to a Wall Street Journal article of Aug. 25. The comments from BHP showed that the company would eventually sell through its own channels, and the company philosophy would be to not cut supply when demand weakens. "We believe in running our assets 100 percent of the time and selling our products at market price," the Wall Street Journal quoted Graham Kerr, BHP's Canada chief, as saying.
The bidding for PotashCorp isn't expected to be over as other companies, including a couple from China, have indicated interest in buying PotashCorp. The Chinese have refused to buy in huge volume through Canpotex and have instead purchased from other sources or short-term Canpotex supply contracts, according to the newspaper report.
"Chinese investors, including a consortium led by private-equity fund Hopu Investment Management Co., are mulling a bid for PotashCorp., people familiar with the situation said. Sinochem Corp., a government-owned company and one of China's biggest potash buyers, has been in contact with PotashCorp about developing a new alliance, a person familiar with the situation said. PotashCorp already owns 22 percent of Sinochem's fertilizer unit," the Wall Street Journal reporters wrote.
Even if a buyer's bid were accepted by PotashCorp there definitely isn't any certainty that the Canadian government would approve the purchase because of the potential impact on Saskatchewan's economy and the future of Canpotex.
Summation of the government concern, as noted by the Wall Street Journal, is quite simple. "Though some Saskatchewan business leaders argue that the region could benefit from keeping production high, provincial officials aren't so sure. Potash royalties are weighted toward price rather than sales volume, meaning that even if volumes increase, revenues won't rise in proportion, said Mr. Wall, the (Saskatechewan) premier. The province is 'loath' to change its royalty structure, he added."
When Canpotex members negotiate higher prices in the global potash markets, those prices impact fertilizer prices in the U.S. where Canpotex does not operate. That is why U.S. farmers aware of fertilizer pricing and some U.S. ag retailers are in favor of an outside buyer busting up Canpotex. (The three individual companies within Canpotex sell fertilizer under their own contracts in the U.S. and Canada.)
U.S. farmers definitely were soured on the fertilizer industry in general when fertilizer prices spiked in 2007 and 2008. U.S. farmers are willing to support most any change in the fertilizer industry that could result in lower fertilizer prices.
PotashCorp will remain in the news if other companies and countries see purchasing the business as a solid annual income generator or a positive supply channel for guaranteeing potash supply for a country's agriculture.
By Richard Keller, AgProfessional editor