With half the world’s potash reserves on tap, enough to supply the world’s needs for the next few millenia, you’d think Canada’s potash industry would be able to sit back and take the long view. Instead, at mine sites and head offices from Vancouver to Saint John, the atmosphere is one of palpable worry. American anti-dumping actions threaten to add another burden to an industry already suffering from dropping demand and lower prices due to the current agricultural crisis. Nowhere do things seem more grim than at the head office of the Potash Corp. of Saskatchewan in Saskatoon. The provincial Crown corporation, which operates four of Canada’s 12 potash mines, suffered an estimated $150-million operating loss last year as Canada’s value of potash production fell to $579 million from $868 million in 1984. Although Chairman Paul Schoenhals says it is much lower, he concedes it is still “a helluva lot of money.” In an effort to slow the losses, 115 management staff at pcs have recently been laid off.
Now, on top of all that, pcs is being fingered by many American potash producers as the price-setter responsible for a 19% drop in prices since 1984. As a result the corporation could come in for special treatment in the anti-dumping action initiated by New Mexico potash producers earlier this year.
The Americans are not alleging industry-wide subsidies as in the softwood lumber dispute, a trade dispute that resulted in an across-the-board, Canadian-imposed export tax on softwood exports to the U.S. and much political hay-making for the Opposition Liberals. In this case, the Americans are saying individual companies dumped potash on the American market and should face individual penalities.
For dumping to exist, one of three things must be proven: either that potash was sold more cheaply in the U.S. than in Canada, that it was sold more cheaply in the U.S. than in other international markets or that it was sold for less than the cost of production.
Canadian producers have little to fear under the first definition: Canada absorbs such a small percentage of total sales that no meaningful comparison is possible. The second definition would have been more troublesome a year ago when longer-term contracts had the effect of keeping offshore prices higher than those in the U.S., but the difference has since narrowed.
The third definition, agree Canadian producers, is the one most open to interpretation. Schoenhals says it is simply a case of oversupply during a period of falling demand: the price is being bid down and Canadian producers must match it in order to stay competitive. The Americans contend that Canadian producers, led by pcs, have forced down the price in order to gain market share at the expense of the five American mines centred around Carlsbad, New Mexico.
To date the hearings have upheld the American view: a preliminary International Trade Commission determination has already noted that Canadian companies have boosted their share of the American market to 82.6% in 1986 from 76.7% in 1984, despite a decline in U.S. consumption of 19% due to the poor farm economy. As the action progresses, Canadian producers will be arguing that the American problems stem, not from the drop in prices, but from the depleted state of their orebodies. This is crucial to the case because before any penalties can be levied, it must be proved that American producers were directly injured.
There is a lot riding on the decision. If tariffs equal to the dumping margin alleged by New Mexican producers — 42.86%, or about $12(US) per tonne — were levied, the cost to Saskatchewan producers could be as much as $115 million a year in lower earnings and lost markets, according to the province’s finance minister, Robert Andrews.
This would be bad news indeed for an industry which has only managed to maintain historic production levels since a disastrous 1982 at the expense of lower prices. Saskatchewan has seen the value of its potash exports drop from around the billion dollar mark in 1980 and 1981 — years when it challenged petroleum as the province’s second largest export commodity after wheat — to an estimated $580 million in 1986. Even at recent lower levels, potash ranks as one of the province’s most valuable industries, employing 4,000 people and accounting for some 3% of the provincial gnp. So far, damage to the Saskatchewan economy has been muted, but 1987 is shaping up to be a much tougher year as the provincial Progressive Conservative government led by Premier Grant Devine attempts to come to terms with a budget deficit of more than a billion dollars at the same time as agriculture, petroleum, potash and uranium — all of the province’s major export industries — experience difficult times.
Meanwhile, pcs and Canada’s other potash producers — Central Canada Potash, International Minerals & Chemicals Corp, Kalium Chemicals, Potash Co. of America, Potash Company of America, Cominco and Denison-Potacan Potash — are discovering that the complexities of the anti- dumping action are already costing them time, manpower and legal fees.
The process began Feb 10, when a petition from two New Mexico producers was received by the International Trade Administration, a division of the U.S. Department of Commerce. It will not likely end before the third week of November when, if the itc affirms ita findings, the ita will issue a Dumping Levy Order.
Two points at which dumping charges could have been halted have already passed. On March 2 the ita deemed the petition worthy of further investigation. On April 3 the itc agreed, suggesting that there was indication of “unfair price discrimination.” Now Canadian producers have been supplied with questionnaires which will be used, among other things, to determine a “constructed value” upon which the third definition of dumping will hinge. By July the ita will have made a preliminary determination of whether dumping exists. If it finds there has not been dumping, the investigation will end there. If it finds there has been, a bond equal to the estimated dumping margin must be posted by Canadian companies. In October the ita will make a final determination. If it is affirmative the itc will make a final determination of injury. In that case the ita would issue orders in late November against companies found guilty of dumping.
As the action progresses Canadian producers are taking heart from a similar U.S. action launched against various overseas suppliers in 1984. In that instance, the initial allegation of a 187% dumping margin against the U.S.S.R. was whittled down to less than 2% during the investigation process, and no penalty was imposed. East Germany and Isreal fared similarly.
That bright note notwithstanding, potash producers are reluctant even to speculate on what the implications of an anti-dumping tariff might be. John Van Brunt, vice president operations of Cominco which operates the Vade potash mine at Vanscoy, Sask., says it is conceivable that the mine could be shut down. At the same time he notes that Cominco is also a large fertilizer company and that this helps it sell potash. Cominco has traditionally been able to hold a larger market share than its production capacity would suggest. He sees the U.S. farmer as another big loser if high tariffs are introduced. American fertilizer prices would rise, further dampening demand and forcing prices even lower.
Jurgen Racherbaumer, executive vice-president of Potacan which, together with Denison Mines, operates the Denison-Potacan mine near Sussex, N.B., is taking the view that whatever he says may be used against him. “The Americans are watching anything that comes out of Canada,” he says. “The less we tell them, the better for our side.” Racherbaumer says the two New Brunswick producers — his own company and Potash Co. of America (which is 87.8%- held by Rio Algom) — are in a somewhat different situation from their Saskatchewan counterparts in that they supply an East Coast market which the New Mexico producers can not realistically supply as a result of transportation costs. But, he says,
“How that is going to reflect in calculations and evaluations by the U.S. Department of Commerce is difficult to predict.”
Meanwhile politics as much as economics will probably determine the response at pcs, inextricably linked as it is to the pc government in Saskatchewan. Already the anti- dumping issue has been complicated by the government’s announcement that it would write off $400 million in pcs debt. The Americans, naturally suspicious of any Crown-owned company, took it as a clear sign of subsidy. The government quickly back-tracked, but the damage may already have been done.
On another occasion Premier Devine suggested the industry should undertake to raise its prices in response to the anti-dumping action. He has since recanted, and there are no signs the government will enter the fray with industry-wide legislation as did Ross Thatcher’s Liberal government in 1970, when each mine was restricted to a set production rate based on capacity. Such pro-rationing would benefit pcs, which currently accounts for half of Saskatchewan’s total capacity but only about 30% of American sales, at the expense of private Saskatchewan producers. Schoenhals, who was himself a member of the Devine cabinet before losing his seat in 1986, explains that the government wishes to see Saskatchewan shed its role as the residual or swing supplier which must take the initiative whenever an oversupply situation develops.
Regardless of the outcome of the anti-dumping action, it seems certain there will be changes ahead for pcs. Schoenhals believes the debt-ridden corporation has the potential to be profitable but says that some form of downsizing or privatization is likely in the near future. He suggests several forms this could take:
* public participation through share ownership;
* sale of all or part of the corporation to competitors;
* merger with a complementary corporation;
* or equity investment by a foreign fertilizer consumer, perhaps India, China or Japan.
In looking for buyers, Schoenhals is obviously hoping someone is willing to take the long view; what they’ll see is a corporation with mines and reserves good for the next century or so. But right now he and other Canadian potash producers await the third week of November, 1987. That’s when pcs and Canada’s other potash producers will likely find out what the International Trade Commission has in store for them — if the investigation goes that far.
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