There is a boom in the Saskatchewan economy, and economists all point to the increasing exploitation of our resource industries. A major factor has been the expansion of the capacity of the potash industry.
Over the past few years all of the potash corporations in the province have invested capital in their existing mines. These “brownfield” developments have brought thousands of workers to the province. The three existing potash corporations are presently adding new capacity which will total 14 million metric tonnes (mmt). The two new “greenfield” mines being developed by K & S Potash Canada and Western Potash will add an additional 5 mmt.
BHP Billiton has already spent $2 billion developing their Jansen Lake mine and is currently using state of the art borer machines to construct the two shafts. It is hard to believe that the corporation will actually put this development on hold. The first phase of this mine will provide 4 mmt, with capacity to be doubled down the road.
What does this mean for the Saskatchewan industry? In 2010 the existing capacity was around 20.7 mmt. Actual potash production was only 10.4 mmt in 2011 and 8.8 mmt in 2012. So why are the corporations adding another 23 mmt capacity?
This has happened before, during the administrations of T.C. Douglas, Woodrow Lloyd and Ross Thatcher. Ten corporations developed new mines, and given the world market, created significant excess capacity.
Why does this happen? Investment is enticed through government subsidies. These have included exemption from federal and provincial taxes, greatly accelerated depreciation rates, and very low royalties paid to the provincial government for the extraction and use of the resource. In the first round Saskatchewan taxpayers provided special low rates for electricity and natural gas and then built roads, a canal system to provide water, pipelines and a reservoir.
As economist Eric Kierans detailed in his famous 1973 study of mining in Manitoba, Canada has a long history of preferential treatment for this industry. The corporate taxes they paid were significantly lower than those of other Canadian industries. Nothing has really changed.
In 1969 farm prices fell on the world market, and farmers responded by cutting their purchase of fertilizer. A number of potash mines in Saskatchewan were on the verge of shutting down. Premier Ross Thatcher negotiated a classic cartel with the government of New Mexico: a floor price was set for potash and production shares were allocated to the different corporations. The cartel was managed by the Potash Conservation Board, now known as Canpotex, which has responsibility for all offshore sales by the existing Saskatchewan potash mines.
Today Canpotex forms an unofficial cartel with the three Russian and Balarus potash corporations. Uralkali and Belaruskali, linked through ownership, export through the Belarusian Potash Corporation (BPC). Canpotex and BPC control around 70% of world potash sales. In this arrangement the Russian and Balarus firms follow the lead of the Potash Corporation. The corporations in concert curtail production to follow demand. Pricing of sales is remarkably similar. Recently, the three Saskatchewan corporations and Uralkali paid fines to the U.S. government to settle anti-trust charges.
In recent years the world market for potash has been between 50 and 60 mmt. Russia and Belarus have had 30% of this market. Uralkali is expanding capacity by 6 mmt. Farmers around the world are hoping that the excess capacity will result in price competition. Already China and India have managed to reduce prices to around $400 per tonne. Further reductions can be expected, and this will put a strain on Saskatchewan mines. BHP has pledged that it will not be part of Canpotex and will engage in price competition to gain their share of the world market. In a few years the government of Saskatchewan will again have to face the problem of overinvestment in the potash industry.
John W. Warnock is retired from teaching political economy and sociology at the University of Regina. He is author of “Exploiting Saskatchewan’s Potash: Who Benefits?” published by the Canadian Centre for Policy Alternatives in 2011.