The Distillery: BHP's bullet dodge

BHP Billiton’s potash ambitions are centre stage as Russia’s Uralkali goes it alone in the market, potentially blowing the long-standing cartels apart.

The Australian Financial Review’s Matthew Stevens has the most authoritative offering this morning with a complete history of the potash cartels between Russia and Canada that were secured decades ago.

“The eastern bloc alliance has recently not been a happy one, with changes to rules of engagement by Belarus fuelling resentment enough for the Russians to take their leave in a moment described by one senior Canadian analyst, in a grab that will surely be industry legend, as ‘the end of the potash world as we know it’. Which is a fair enough observation given that the news from Russia sucked $US20 billion ($21.976 billion) from the value of a global collection of listed potash producers and inspired projections that the commodity’s price might now fall from its current $US400 range to settle at nearer the $US300 mark. Mind you, there remains a view that Uralkali’s withdrawal is nothing but a tactical move aimed at recovering the security of the cartel it has apparently undone.”

With such uncertainty over the power balance within the potash industry, two questions are being put to BHP Billiton. Firstly, what will happen to the miner’s Jansen project in Canada? Secondly, was the Canadian government’s decision to reject BHP’s bid for PotashCorp a blessing in disguise? Both questions can only be speculated on.

Here’s Fairfax’s Elizabeth Knight:

“BHP Billiton appears to have dodged a bullet in its failed $US40 billion attempt to buy Canada's PotashCorp a few years back …The potash market is now in disarray, leaving questions over the value of BHP's investment in its own greenfields potash development, Jansen, also in Canada. … In just a day, the economics of the industry have changed. Pricing certainty has disappeared in the short to medium term and the remaining alliances will come under pressure.”

So that’s a pretty strong voice affirming that BHP Billiton can count itself lucky that it was turned away by Ottawa.

Business Spectator’s Stephen Bartholomeusz perhaps isn’t so sure about that, given that breaking the potash industry cartel was, to some extent, BHP’s aim.

“BHP is attracted to the sector because its long-term fundamentals are attractive, with demand rising steadily as the bigger developing economies, particularly in Asia, rise up the wealth and protein curves and the pressure on the availability, and productivity, of arable land intensifies. The trajectory of that demand is also attractive – it follows, but lags, the demand curves for commodities like iron ore and coal. BHP Billiton always intended, whether by acquiring PotashCorp or developing Jansen and the other major potash resources it has in Canada’s Saskatchewan province into the world’s biggest potash producer, to market its output outside the cartel in keeping with its preference for market-clearing prices. It would have recognised the implications that would have for prices. In effect Uralkali has done that job for it and in the process will, if its stance is maintained, force some rationalisation of the sector that improves the near-term supply demand balance and establishes the price at which the market is in balance.”

The Australian’s Barry Fitzgerald appears to be in the same boat as Bartholomeusz.

“It wanted no part of it [the joint marketing] when it unsuccessfully bid $US40 billion for Canada's PotashCorp in 2010. And earlier this year, it again said it wanted no part of it should Jansen become a reality. Mind you, this is not about BHP Billiton wanting to help farmers in India and China raise their crop yields for the feelgood factor. It is simply a reflection of the group's mantra: rather than attempt to game markets, it is best to keep things simple by ensuring low costs of production for any given product, and let market-clearing mechanisms determine the price.”

In other news, The Australian’s John Durie has got his hands on a report from Deloitte indicating that the confidence of Australian chief financial officers “plummeted in the last quarter”.

The main reason was China, which Durie rightly points out is surprising given the relatively resilience of the figures. Perhaps chief financial officers – the company numbers men – are beginning to doubt the official numbers.

On the other hand, perhaps the rest of us don’t have to worry as Fairfax’s Malcolm Maiden picks up on comments from Citigroup chief economist Willem Buiter that Australia has the ability to avoid a recession even if China’s economy turns sour.

“The more interesting question is whether or not the political will exists to use it, should the need arise,” writes Maiden.

Part of Australia’s ability to avoid recession revolves around the state of our monetary policy. Speaking of which, The Herald Sun’s Terry McCrann writes that an interest rate cut at next week’s meeting of the Reserve Bank of Australia is now “certain”.

The Australian Financial Review’s Chanticleer columnist Tony Boyd also comments on Buiter’s notes this morning, adding that the Citi bigwig doesn’t believe China will let its credit issues drag out like Europe.

“Buiter says China has learned the lessons from Japan, which took 14 years to write off the bad loans exposed by the 1989 stock market crash. However, he notes that the Association of South East Asian Nations economies experienced collective memory weakness about the lessons of the Asian financial crisis of 1997-98.”

Still in economic news, Fairfax’s Tim Colebatch writes on the improved income distribution in the Australian economy since the global financial crisis. However, one fifth of the country’s households still command 61 per cent of the household wealth.

The Australian’s economics editor David Uren and his colleague Andrew Main are somewhat relieved that Treasurer Chris Bowen has imposed a five-year moratorium on changes to the superannuation industry. However, Uren adds that a degree of uncertainty remains across a huge number of policy areas that could impact the economy.

And finally, in corporate news, Business Spectator’s Bartholomeusz heralds the final departure of Suncorp’s $940 million in non-core asset loans to Goldman Sachs. Bad loans almost forced Suncorp into selling itself to ANZ Bank for a steal during the global financial crisis.