Reports that the Chinese government has persuaded Sinochem Corp. to make a bid for Potash Corp. of Saskatchewan Inc. should be of concern to Canada, if Beijing wants China to pay unreasonably low prices for fertilizer.
Sinochem, a state-owned chemicals corporation, already does an overwhelming proportion of the Chinese buying of potash, through its subsidiary Sinofert. If Sinochem were to acquire Potash Corp., the exporting of Canadian potash to China - the world's largest importer of this fertilizer - would become a matter of transfer pricing inside a government-controlled multinational.
The Canadian government should only rarely find that a foreign acquisition of a business is not of "net benefit" to Canada under the Investment Canada Act, and consequently decline to approve it.
But if Beijing is indeed orchestrating a bid for Potash Corp. - to compete with the existing bid by BHP Billiton - its intentions may not be purely commercial; rather, there may be a policy goal of subsidizing Chinese farmers by supplying them with inexpensive fertilizer. That could be to the disadvantage of Canada - including the government of Saskatchewan, which is entitled to royalties for potash.
As things stand, Potash Corp. is a member of Canpotex, a group of three potash exporters that sells jointly outside North America, an arrangement that tends to limit supply and raise prices above what they would be in a more competitive, less oligopolistic market.
General economic principles would favour more flexible price movements, up and down, than the prevalence of either Canpotex or the Chinese government would be apt to produce in the potash market.
If a Sinochem bid for Potash Corp. succeeds, Investment Canada's approval might be made conditional on a promise to adhere to fair-market pricing policies. But such conditions are not always easy to enforce, as can be seen in U.S. Steel's continuing resistance in the Canadian courts to an undertaking it had agreed to as part of its takeover of Stelco Inc. in 2007.
Chinese investment in Canada is welcome, just as Canadian investment in China is desirable, too. But a takeover bid apparently initiated by the Beijing government may have a policy motive that is not in accord with Canada's interests; it should be examined with care.
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