In the Great Canadian Fertilizer Fight, the phony war phase has begun. We are now at the equivalent of the Maginot line in late 1939, with armies (of bankers, in this instance) secretly plotting their lines of attack and the rest of us just waiting for the real hostilities to begin.
The aggressor in this fight, global mining outfit BHP Billiton , has pushed as far as it's going to for now. The opposing force will be led by some yet-to-be-identified, state-controlled corporation from China, probably in alliance with a politically-acceptable partner from elsewhere. The spoils of war are the huge potash reserves controlled by Potash Corp. , Canada's third-largest natural resources company, valued at some $40-billion by BHP's brazen takeover bid and probably worth a lot more than that.
The reasons for China's interest are as clear as they are simple. Its 1.3 billion people are fed by a domestic food system that is less productive than it should be. China harvests about half as much corn for every hectare as the United States, according to U.S. government data. Its wheat fields produce far less than Western Europe's. It needs large quantities of fertilizer (of which potash is a key ingredient). But what it has in abundance is foreign currency ($2.5-trillion U.S. of it). Bond yields for crop yields - it's an obvious trade to make.
What's not so obvious is what the Canadian and Saskatchewan governments should say if China enters the takeover battle. So far the idea is being met with indifference (but then, it's the political off season). BHP, China Investment Corp., Sinochem, what does it really matter who wins? But it does matter, not because of China's undemocratic form of government, but because of its form of capitalism.
The best way to explain the issue is with a story - specifically, by recounting BHP rival Rio Tinto's dalliance with a Chinese investor last year.
To recap: Rio took on big debts to pay for its 2007 takeover of Alcan. Those debts became a millstone when the world economy went pear-shaped and the financial markets seized. Desperate for money, Rio executives turned to one of the few available sources of it in early 2009. The Aluminum Corp. of China, or Chinalco, was only too happy to oblige.
Through a complex deal, it offered $19.5-billion to Rio. But this was not an investor simply making a loan and taking a large equity stake. Chinalco also got direct ownership in a number of Rio Tinto assets. The biggest piece of the puzzle had to do with iron ore, of which Chinese steel mills are voracious consumers. To oversimplify things: China would own a piece of an iron-ore export operations in Australia, and - here's the key - would be assured of getting at least 30 per cent of the output from it. Chinalco also received guarantees of supply of other raw materials.
This, among other aspects of the deal, set off the alarms inside Australia's legislature and in the executive suites at the big global mining companies. Australia, with its vast stores of iron ore, benefits from the fact that the commodity is largely controlled by a few players (BHP, Rio, and Vale of Brazil). They've got pricing power.
Now here was a major customer becoming an owner. Business owners are motivated by profit. Customers, of course, have the opposite motivation - they want low prices. Would Chinalco, which is owned by the Chinese government, use its new influence at Rio to try to break the iron-ore oligopoly? Would it then try to use that muscle to drive down prices of other key Australian exports, like coal? It's a thin-edge-of-the-wedge type of stuff, but the argument resonated. After a firestorm of political and shareholder opposition, the Chinalco deal died, and Rio saved itself the conventional way, by raising billions in new equity.
Potash Corp. isn't Rio Tinto. It's not financially stressed and it doesn't need to sell. Still, there are parallels with the Australian situation. It exploits a large, important, and scarce resource. It has sway (though not complete control) over the price of that resource because there are few suppliers of it, and because Canada's major potash producers collaborate to enhance their export power. And the powers in Beijing would love nothing more than to break that control if they could - because doing so would, in the long run, probably mean a very significant transfer of wealth from Canada to China.
Maybe we're fine with that, and maybe there's no good reason at all to deny China an ownership stake in the Canadian potash trade. But it isn't xenophobic to insist that we have a real discussion about it first.
Derek DeCloet