Potash fails to fertilize the Canadian economy

The Tories’ decision to protect the ‘strategic’ asset in 2010 has backfired on shareholders.
Infertile ground
David Stobbe/Reuters

Stock analysts who are bullish on potash have two powerful arguments in their corner: people have to eat, and land is something that nobody’s making any more of. As billions in Asia adopt middle-class habits to go with their rising affluence, their food needs will need to be met by global agriculture—somehow. The Potash Corporation of Saskatchewan (PCS) sees its product, used as a yield-enhancing fertilizer component, as part of the solution; it’s a tale told as often in PCS investor documents as the Christmas story is in December.

“Each year, the global population grows by about 75 million,” says the company’s 2011 online overview. “It is a simple reality that more people mean more food must be produced.” Most of the growth, the slide show adds, is in urban areas—and “urban consumers tend to eat higher-quality diets that include meat, fruits and vegetables.”

But while people have to eat, there’s nothing that says they have to eat the most land-intensive agricultural products—which means, basically, beef. (In Simon Fairlie’s meat-friendly 2010 sustainability book Meat: A Benign Extravagance, he estimates that it takes about 10 lb. of feed grain to produce a pound of beef.) According to the U.S. Census Bureau, beef consumption in an otherwise growing world declined by almost three per cent from 2007 to 2010. In the U.S., the European Union and Canada, the decline was six per cent. In China, it fell by eight per cent. Maybe nobody’s making more land, but when eaters switch from beef to chicken and pork in the face of an uncertain economy, that reduces the pressure to farm existing land more intensely using costly new fertilizer inputs.

That’s one deep reason for the back-to-back nasty surprises that the potash business inflicted on Canada late last month. On April 26, PCS announced that profits were down by one-third for the second quarter of fiscal 2012; it reduced its overall earnings forecast for the year to between $3.20 and $3.60 per share, thus wiping out the $3.64 average expected by analysts, and slashed its estimate of total global potash demand and of its own shipments.

A few days later, Statistics Canada released its gross domestic product estimates for February, and those numbers were not quite what anyone had been anticipating, either. The market had expected Canada’s GDP to grow by 0.2 per cent for the month, but instead it declined by about that amount. A major culprit, the agency said, was potash. In February PCS had temporarily shut down its mines at Rocanville and Lanigan in southeastern Saskatchewan—a move, it said, aimed at “matching supply with market demand.” In other words, PCS couldn’t move enough potash at the price it was asking. The dip stands out in the tables like a sore thumb; potash mining, usually responsible for about $1.2 billion in annual GDP, plunged to just $976 million between January and February.

As recently as the summer of 2010, when Australian mining giant BHP Billiton attempted a hostile takeover of PCS, the pink potassium-bearing mineral was a source of excitement rather than a vector for economic flu. February’s potash downturn is supposedly temporary, and PCS says it foresees no further demand-driven shutdowns in 2012. Spot prices are expected to remain steady as PCS continues to negotiate long-term contracts with China and India—countries with a lot of room for growth in fertilizer use, but where hard-nosed governments use their pull to counteract the pricing power of the Canuck potash oligopoly. Canada is sitting on about half of the world’s proven potash reserves, which while costly to mine are abundant enough to cover hundreds of years of consumption at current rates. (PCS CEO Bill Doyle describes his own company as having “a thousand years of reserves” and adds that it can meet world demand for the next century just from the mine shafts it has already sunk.)

For now, the stock market is not endorsing Doyle’s view that BHP Billiton’s 2010 takeover offer was borderline insulting. BHP wanted to pay $130 a share for PCS, but Doyle sniffed and said PCS was worth $170 if it was worth a dime. The stock, which has split three-to-one, now sits just under $42. If it continues to slide, shareholders may start wondering if the federal government did right in blocking the BHP offer in a federal foreign-investment review on the dubious ground that Canadian potash, being part of the global food-supply chain, is a uniquely “strategic” resource. (BHP, meanwhile, says plans are proceeding for its new Jansen mine, east of Saskatoon, but there are widespread doubts whether the PCS rival will stick to its plan to start extracting in 2015.)

Lawyers for the Canadian law firm Osler, Hoskin & Harcourt recently pointed out in a paper on the country’s “post-Potash” capital markets that the Conservatives have, reassuringly, failed to keep up an aggressive defence of “strategic resources” when it comes to oil and gas. Fossil fuels are part of the food-supply chain too, and farmers can’t avoid them for a crop year or two, as they can with potash. But Sinopec, a state-owned enterprise (SOE) of the Chinese government, was allowed to buy outright control of natural gas exploration firm Daylight Energy last fall for $2.2 billion, and Chinese SOEs have been snapping up minority holdings elsewhere in the Alberta oil patch.

Potash isn’t different because it’s more “strategic” than oil and gas: it’s only different because Canada is the largest supplier, and Canadian firms should thus be able to dictate prices. In theory. But even a monopoly still has to compete with the buyer’s ultimate alternative: going without.