BHP, Potash, and Vale Inco

4 10 2010

Stories about the pitfalls of foreign ownership of Canadian mines have been in the news recently.

Export Development Canada, a Crown Corporation, has announced that it will be lending Vale Inco, a Brazilian firm, a billion dollars to expand its nickel mining operations in Canada. Vale is a “national champion” that was created by a Brazilian government concerned about foreign control over that country’s mining sector. The support the Conservative government is giving to Vale has aroused the ire of unions, especially since workers in Sudbury, Ontario recently ended a long and bitter strike against Vale. The bitterness surrounding the Vale strike had prompted some to call for a stronger policy limiting foreign takeovers of Canadian mineral companies. Foreign takeovers of Canadian companies require the nominal assent of Industry Canada, a branch of the federal government, but this assent is almost always a formality, since Industry Canada is staffed by neo-liberals who are ideologically opposed to foreign ownership restrictions. According to the Globe and Mail:

Only once in the 25-year history of the Investment Canada Act has the federal government tried to use the act’s legal powers to force a company to live up to its commitments. Ottawa sued U.S. Steel for shutting down Stelco’s operations and cutting jobs and reneging on spending commitments. But the case is still inching its way through the courts and it is unclear if the government will be able to force the American company to change course.

See here.

Canadian economic nationalists are very fond of quoting Don Argus, the former head of the Australian firm BHP. In 2008, Argus, who is Australian, warned his compatriots of the dangers of allowing that country’s mining industry to be taken over by foreign firms. “Australia will incur a substantial opportunity cost and in the worst-case scenario, our resources will fall into overseas hands and we will also become a branch office – just like Canada.” In this case, Canada was being used as an example of what not to do.

Sometimes what is good for the goose is not good for the gander. BHP is now bidding for Potash Corporation, a former Saskatchewan Crown Corporation. The CBC’s Don Newman has recently published an essay arguing that the Saskatchewan and Canadian governments should prevent the purchase of PotashCorp by BHP.

I’ve noticed something interesting about the press coverage of the proposed BHP-Potash deal. Some observers seem to think that BHP’s acquisition of PotashCorp would result in increased production and a big drop in the price of potash. Right now, PotashCorp and the other Canadian potash producers form an OPEC-style cartel called Canpotex. Canpotex restricts output to keep prices high, which means that Potash’s facilities in Saskatchewan are currently idle, with many of the miners on unemployment benefits.

An article in the Globe and Mail has suggested that the sale of Potash to BHP would break the cartel and result in the introduction of the different philosophy into the industry, namely, going for volume rather than price. Potash would then produce at capacity, which would mean lots of jobs and even overtime for the workers.

See here.

Other observers, such as Bloomberg, believe that the purchase of Potash by BHP would actually make the industry more oligopolistic and would increase prices even more.

The world’s eight largest potash miners, whose market control already exceeds that of oil cartel OPEC, are poised to tighten their grip on prices of the crop fertilizer as proposed mergers consolidate sales channels.

See here.

I’m not certain who is right– Bloomberg or the Globe and Mail. I would probably trust Bloomberg for the simple reason that it is in the business of supplying news to a small group international investors and which isn’t trying to influence political debate any one country.

All of these articles are silent on the moral dimensions of a cartel that serves to increase the price of fertilizer and food in developing countries.

PetroChina and the Oil Sands

3 09 2009

The Canadian media has generated a host of stories related to PetroChina’s purchase of a large stake in the Alberta oil sands. See here, here, and here. The Calgary Herald is advocating that the federal government block the sale. The Economist has coverage here. Some of the discussion revolves around whether the federal government will allow PetroChina, a state-owned company, to complete the purchase. The existing legislation governing foreign takeovers of Canadian companies is nebulous on the subject of state-owned enterprises. Interesting, the deal has been opposed by some Americans, who object to the Chinese acquiring energy resources in America’s “backyard”. (Apparently, these people believe that the United States has some sort of prior claim on Canada’s resources).

I’m interested by the possibility that this controversy might be the beginning of a contest between two economic giants, the United States and China, for Canada’s resources. For decades, Canada has been firmly in the economic orbit of the United States. I would welcome such competition for Canada’s energy. First, from a strictly economic point of view, it is better to have multiple parties bidding for one’s assets. Second, from a political point of view, I think that it is important to have a force in Canada that can counter-balance the overwhelming influence of the United States. One of the broad lessons of Canadian history, in my opinion, is Canada is most likely to maintain its autonomy vis-à-vis its superpower neighbour by associating itself with powerful nations off the continent. In the past, the off-continent partner was the United Kingdom. In the future, it may be China.

There is more about PetroChina here.