Chinese and Indian fertilizer buyers are ruining Bill Doyle's potash party. The CEO of Potash Corp. of Saskatchewan blamed disappointing third-quarter earnings Thursday on foreign purchasers, since they are balking at paying the high prices he and other potash producers are charging.
But Mr. Doyle is confronting an even more unwelcome party guest: anti-trust forces south of the border. A class-action lawsuit moving its way up the U.S. court system accuses Potash and six other producers in Saskatchewan and the former Soviet Union of colluding to keep potash prices high, not in China or India, but the U.S. itself.
The legal action, filed by a group of customers in 2008, accuses six producers of colluding to suppress supply and fix prices at high levels. The lawsuit alleges that through two global "marketing organizations," the two sets of regional miners have access to each others' sensitive production capacity and pricing information. They first negotiate prices in key Brazilian, Indian and Chinese markets, then use those prices as benchmarks for sales to U.S. customers, the lawsuit alleges.
It's evident potash producers have been dictating terms to buyers for the better part of a decade. They jacked up prices by 600 per cent from 2003 to 2008. Global potash demand seems to have levelled off in response; shipments this year are forecast to be as much as 8 per cent lower than the level in 2005, according to Mr. Doyle.
A lower court quashed the original complaint but in June the U.S. Court of Appeals for the Seventh Circuit in Chicago revived the lawsuit. "It is objectively foreseeable that an international cartel with a grip on 71 per cent of the world's supply of a homogeneous commodity will charge supracompetitive prices," the eight-judge panel wrote.
One of the Russian companies, Uralkali, last month agreed to settle out of court for $12.75-million (U.S.), but the cost to Potash and fellow Saskatchewan miners Mosaic and Agrium should they lose the case at trial will be considerably higher, National Bank Financial analyst Robert Winslow estimates – to the tune of a combined $2-billion or more.
Should investors panic about the outcome of the legal action? Not yet. The case likely won't conclude for years, and any outcome is unlikely to change the stranglehold current producers have on the potash market. After all, it's not exactly in the interests of Canada or Saskatchewan to quash a cartel that has brought in a bounty of tax revenues. But it is one more thing for Potash investors to ponder.