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When BHP Billiton Ltd. made its ill-fated $40-billion (U.S.) bid for Potash Corp. of Saskatchewan Inc. in 2010, the world was a different place. Two years after the financial crash, people still spoke of a commodities supercycle underpinned by the economic motors of China, India and Southeast Asia. Saskatchewan was touted as the Saudi Arabia of agriculture; its grain harvest and potash mines would feed the rising Asian middle class, they said. Three years on and hedge funds are scrambling to get their money out of emerging markets. India faces a balance of payments crisis and the rupee is being pounded on the foreign currency markets. No surprise to learn that the potash price has collapsed.
India is the fourth-largest consumer of potash and the major Indian buyers were last week demanding big discounts for the mineral, the main source of potassium used in fertilizer. Meanwhile, BHP was downgrading its ambitions for a swift development of Jansen, its multibillion-dollar potash mining project in Saskatchewan. The company will invest $2.6-billion digging shafts over the next four years but production is pushed back from 2015 to 2020.
BHP's presentation to investors on Monday may have sounded a bit glum, with disappointing profits and massive cutbacks to investment. The company is battening down the hatches, but at least BHP is not writing off multiple billions of dollars of Potash Corp., whose share capital is now worth only $26-billion.
For that blessing, BHP has to thank an outburst of resource nationalism in Ottawa, where there were then doubts that BHP would make a good partner in the good ol' boys club of potash, protecting prices and sharing the benefits of collective marketing under Canpotex Ltd. In the end, open markets prevailed because Uralkali, a major Russian producer, pulled out of the other joint marketing group, Belarussian Potash, which together with the Canadians controlled most of the world's potash resource.
BHP has learned not to believe in supercycles, and even if it still hankered after the notion of an Asian Atlas supporting the world, the financial markets are today screaming their warnings about a looming debt crisis in the East. The virtuous circle of borrowing cheap dollars to finance Asian factories to sell cheap goods to Americans is finally broken. The cost of U.S. dollars is on the rise and the greenbacks are going home. China, India and Indonesia will have to find some other way of funding trade and it isn't going to be easy. The fear of hidden debt mountains in India is provoking a rout from the rupee, which has lost 17 per cent against the dollar over the past four months. That means a lot less potassium fertilizer heading for the Punjab or, more likely, a much lower potash price.
It's a salutary lesson for Canadians who persist in seeing their natural resources as stores of latent value that must be protected like a hoard of silver dollars. The price of potash is not set in Regina, nor in the Russian Urals. Its value is what an Indian farmer can afford to pay for fertilizer, just as the value of Canadian oil depends on the level of crude stocks in American refineries. Talk of supercycles blinded many to the golden rule of commodities: Over long and short cycles, only the most efficient and the lowest-cost producers will survive.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.