INSIGHT: Politicians target potash royalties in Canada

19 April 2011 15:29  [Source: ICIS news]

By: Lauren Williamson

LONDON (ICIS)--The rising price of potash has made the fertilizer a political target in Saskatchewan, western Canada, where some politicians say the public deserve a bigger cut of the growing profits.

“We’re seeing windfall profits that nobody expected to be in place and it should be shared with the public,” Dwain Lingenfelter, leader of the New Democratic Party (NDP), said. He has made conducting a review of the royalties a top campaign issue ahead of the 7 November provincial elections.

In the lead up to the recession, potash prices climbed to above $980/tonne (€686/tonne) FOB (free on board) Vancouver, a key reference price for the international market.

Prices then fell dramatically following the 2008 slump, finally stabilising around $320/tonne FOB Vancouver by the end of 2009. Since then, they have risen steadily because of robust demand and tight supplies.

Global potash producer Potash Corporation of Saskatchewan (PCS) has its primary base in Saskatchewan and is a major source of potash for global markets, particularly in the US with its massive agricultural sector. PCS prices are generally followed by small and medium market players.

Recent spot deals in Brazil illustrate significant prices in the current international market. Business for May was concluded at $525/tonne CFR (cost & freight), a $50/tonne hike from the previous month and a 32% increase from similar deals last year.

Recent increases are attributed to high crop prices, boosted biofuel usage and short supplies on the producers’ side. Higher costs have also prompted many officials in India to temporarily halt potash imports.

“All of the profits [from potash] are going to the foreign shareholders and none of that is going to the owners of the resource – the people of Saskatchewan,” Lingenfelter said.

Saskatchewan’s royalty is based on a formula using the producer’s profits and total volume sales, whereby the government collects roughly five cents for every dollar.

Of PCS’s 2010 profits, which totalled $1.8bn, the royalties and taxes paid out totalled about $77m. That figure has not increased in recent years because PCS’s massive capital expansion programmes, totalling $7bn ($5.3bn of which is in Saskatchewan), are not subject to the same tax regulations. A PCS spokesman said the current royalty structure was adequate, with no need for a review.

Premier Brad Wall, of the Saskatchewan Party, has publicly stated that reviewing the royalty system and capturing more rents could hinder planned expansion efforts. His party’s website further described a potential royalty increase as “job killing” and said it could impact the commodity price and, in turn, hurt local farmers.

Expansion projects are still set to be rewarded with huge profit returns and are not likely to be stalled or stopped due to a royalty review.  

“PCS’s expansion plans were committed to a number of years ago – around six years ago – and that was when prices were less than half what they are today,” Lingenfelter said.

In addition, because potash resource deposits are located in specific geographical regions, relocating production facilities is not a viable option for companies. The PCS spokesman said the company would not change any of its expansion plans, even if a royalty review was conducted. Other producers ICIS contacted did not comment.

However, due to the fact Canada owns the majority of the world’s potash resources, prices set by the region serve as a benchmark for international sales. If the Saskatchewan government does choose to ramp up its collection of royalties from PCS, causing PCS net profits to diminish, end-users fear the company may boost potash prices to pass those losses on.

PCS was formerly owned by the government of Saskatchewan before it was privatised in 1989, cultivating what could be viewed as a special relationship between PCS and the government.

The recent attempted takeover of PCS by Australia-based BHP Billiton was thwarted by the government because of fears it would decrease the province’s tax revenues. This marked a break from previous government policy, which supported free enterprise and fair competition.

PCS is currently the world’s largest potash producer. Its brownfield expansion and debottlenecking projects should allow the company to produce 17.1m tonnes/year by 2015, a figure equivalent to more than 50% of total global production for 2010.

Any potential royalty changes, according to Lingenfelter’s plans, would ensure PCS maintains its profitability and attractiveness for investors. Lingenfelter said the new government funds would go towards boosting the local labour pool and strengthening provincial infrastructure, both of which would ultimately support potash-producing operations.

Lingenfelter, who was the province’s deputy premier from 1991 to 2000 and spent more than a decade working for private energy companies, said a balance should be struck between the private and public sectors. Whether he wins the November election or not, he wants the next government to conduct a full review of the royalty system.

Lingenfelter said he has made contact with the major potash producers in the region and is hoping to speak to them individually, though dates have yet to be set. The latest public opinion poll, posted by Election Almanac, indicates the incumbent party is still favoured among voters, with the NDP trailing by 30 percentage points.

“It can be a win-win situation,” Lingenfelter said, while noting that this type of political interest in natural resources is likely to be a global trend as commodity prices rise. “I don’t see Saudi Arabia letting anyone else own their oil, and there’s good reason for it,” he added.

($1 = €0.70)

For more on potash and phosphate fertilizers, visit ICIS pricing fertilizers

By: Lauren Williamson
+44 (0) 20 8652 3214

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