Potash cartel shift sends shivers through Saskatchewan

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The world's largest mining company has designs on building the world's largest potash mine, by a factor of two, near a tiny Saskatchewan town.

But now that project is one of the province's biggest economic question marks.

The economics of BHP Billiton Ltd.'s proposed $14-billion Jansen potash mine have suddenly been thrown into disarray with the collapse of one of the world's two potash cartels. Russia's OAO Uralkali dropped out of Belarus Potash Co., marking a major shift the global potash industry.

The surprise move is sure to send a shiver through Saskatchewan's economy, which has enjoyed a long run of prosperity on the back of the global resources boom. The province's royalties, incoming investment dollars, and employment rate are set to feel the pinch from potash prices that are expected to tumble because of the cartel's demise.

Saskatchewan's good times have been propped up by a host of commodities – namely oil, gas, potash, and uranium – and these non-renewable resources played a significant role in transforming it into a "have" province. Potash's growth prospects in Saskatchewan, however, are less rosy as the overseas cartel crumbles because BHP's undeveloped project now looks less attractive under the cloud of depressed potash prices.

"It almost certainly means that the Jansen mine is going to be delayed or deferred," said Patricia Mohr, a commodity market specialist at Bank of Nova Scotia. "The capital costs of the Jansen mine are very large ... They need much higher prices."

The Jansen mine's future was already in question as the global potash market faced oversupply. Russia's decision to cut ties with its marketing partners could seal Jansen's fate if potash prices drop much further from already weak levels.

Potash is a significant contributor to Saskatchewan's fiscal health.

The province expects to take in $519.9-million in potash royalties in fiscal 2013-2014, according to the provincial budget. This is up from its forecast haul of $397.4-million the previous year. By way of comparison, oil revenue is expected to total $1.44-billion in 2013-2014, and all of the province's non-renewable resources are expected to bring in $2.67-billion.

But the government's outlook for buoyant potash prices to fuel growing royalties in the coming years suddenly looks off the mark.

Potash mining makes up more than 2 per cent of Saskatchewan's economy, according economists at the Royal Bank of Canada. Saskatchewan's gross domestic product could drop by one percentage point if potash production dropped in the double digits for the remainder of the year, RBC said Tuesday.

The province's Saskatchewan Party government said it is too early to say how Russia's Uralkali's decision will affect price, production, and provincial revenue. However, the government intends to speak with potash producers in the province – a trio of companies that make up Saskatchewan's own cartel – to better gauge the fallout.

At the same time, the government is preparing for a change. "We will also be evaluating the potential impact on potash revenues, which will be reflected in the first quarter financial report when it is released in August," Kathy Young, executive director of communications for the government, said in a statement.

BHP has sunk a production and service shaft at Jansen, but has not yet decided whether to proceed with the project. It declined to comment on how Russia's decision will affect the market.

BHP's competitors, however, argue Jansen that will be put on hold. "If prices change dramatically it calls into question projects such as the BHP Jansen Lake project. How could that possibly be economic if potash prices are going to be significantly lower? And I think that is true for any number of proposed new greenfield expansion projects," said Lawrence Stranghoener, Mosaic Co.'s chief financial officer.

Experts argue fewer new projects and lower prices mean companies might increase sales volumes from existing operations, both to meet their own financial goals and because potential customers in emerging economies such as India and China might be more amenable to buying the commodity at lower prices.

With files from freelance reporter Brenda Bouw

The original print version and earlier online version of this story stated the province's Progressive Conservative government said it was too early to determine how Uralkali's decision would affect the province. This online version has been corrected.

With files from freelance reporter Brenda Bouw