Potash advantage illusory – Editorial (Winnipeg Free Press – December 5, 2013)

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Potash Corp. will lay off 1,045 employees, 18 per cent of its workforce, because of low prices and poor sales of the crop nutrient it produces, the company announced this week. The decision marks a sharp setback for the Saskatchewan government’s attempt to maintain cartel pricing in the potash market by preventing an Australian mining giant from buying the Saskatoon-based company and making it compete in an open market. A well-organized open market would serve Canada better.

Saskatchewan Premier Brad Wall put the bravest face he could on the failure of his policy. The province is enjoying good employment growth despite declines in the resource sector, he said after the massive layoff was announced. That seemed odd, because just three years ago, when BHP Billiton was trying to buy Potash Corp., he was telling the country the company was strategically important to Saskatchewan and could not be allowed to fall into foreign hands. Now, suddenly, Saskatchewan doesn’t need it so much after all.

In October 2010, when Billiton was offering $130 a share for all the outstanding shares of Potash Corp., Premier Wall told the Saskatchewan public it was a bad deal for the province. Billiton was going to take the Saskatchewan company out of the Canpotex producers’ cartel and compete for sales. This would not work and the Saskatchewan industry would suffer, Mr. Wall believed. He urged Prime Minister Stephen Harper and the ruling Conservatives to block the takeover.

Mr. Harper responded to the prevailing view in Saskatchewan and blocked the takeover on the grounds it offered no net benefit to Canada.

That decision seemed at the time to be based more on a reading of the political winds in Saskatchewan than on a dispassionate analysis of the economic merits of the case. It is even more difficult to defend today.

This year, the Russian potash producer Uralkali pulled out of the cartel led by neighbouring Belarus and started dealing directly with purchasers. Prices dropped sharply as a result. It is never quite clear who is buying and who is selling and what the prices are in the potash market because deals are negotiated privately, not reached in a competitive market. But since the Belarus cartel collapsed, nobody is buying Saskatchewan potash. Hence this week’s layoffs.

Russia has essentially broken up the cartel structure as Billiton proposed to do three years ago. The difference is Saskatchewan is the victim and not the aggressor in the potash price war. Russia is selling potash while Saskatchewan is turning to other things.

There is, of course, no assurance Saskatchewan would have immediately fared better with the Billiton takeover.

It is possible Billiton would have laid off 1,045 people because of the difficulty of selling Saskatchewan potash into a glutted market. Either way you slice it, the cartel structure was on its last legs and the attempt of Premier Wall and Prime Minister Harper to keep it going has not succeeded.

A well-organized open market is a more sustainable system than a cartel. A cartel fails as soon as one major participant sees an advantage in cheating behind the backs of the others. Participants in open markets also try to cheat, but most of the participants find their interests served most of the time and so the system is preserved.

Mr. Harper and his government now want to make commerce the main guiding principle of Canadian foreign policy. The potash market might be a good place to start. Canada should take a lead in helping the buyers and sellers of potash to organize a market in potash contracts — a market where supply and demand will rule and where no small coterie of producers will be able to dictate prices or enforce discipline against their competitors. This reform will serve Saskatchewan and the rest of the potash world much better than fresh attempts to block trade and manipulate the market.

For the original version of this editorial, click here: http://www.winnipegfreepress.com/opinion/editorials/potash-advantage-illusory-234554671.html

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