Singed by the potash cartel

Pradeep S. Mehta | Updated on September 17, 2013 Published on September 17, 2013

Potash pricing should have been contested. — N. Rajesh

India, which has been fleeced by the Russia-Belarus cartel, will benefit from the latter’s break-up.

A large number of cartels, particularly in the natural resources sector, operate in the world, the most egregious one being crude oil.

Since drilling for oil is considered a sovereign activity, the OPEC cartel does not violate any competition law in the world.

However, other commodities such as potash are subject to competition law disciplines. However, most competition laws, including those of India and 50 other countries, do not cover export conglomorates.

With the recent break-up of the Russian-Belarusian potash cartel — Russia’s Uralkali quit the Belarusian Potash Co. (BPC) partnership and broke up a marketing venture that controlled about 43 per cent of global exports — the potash cartel is in the news again.

Potash, a naturally occurring mineral, is one of the key fertilisers required for agricultural production. Canada owns 52 per cent of the world’s known reserves of potash.

The three largest producers of potash in Canada are Potash Corp, Mosaic, and Agrium with a total share of 35 per cent of the world’s market. They are part of a 41-year-old cartel called Canpotex.

BPC and Canpotex together control more than 70 per cent of the world potash market. They co-ordinate their production to maintain high prices.

In the last nine years, the annual or half-yearly contract prices in all the major markets, i.e. China, India, Brazil and others, were set either by BPC or Canpotex. The other exporters merely follow the same price structure. Members of Canpotex have faced competition litigations and have been fined heavily, even in the US.

Biggest importers

India and China are the biggest importers of potash. As India is totally reliant on imports to meet its needs for potassium, it is severely impacted by the high prices.

A study by the noted competition expert, Frederic Jenny, estimates that India imports an average of six million tonnes of potash a year during 2011-20, which would be financed to a large extent (50-100 per cent) from a $1.5 billion annual subsidy by the Government of India.

A report by the Conference Board, an independent research organisation commissioned by the government of Saskatchewan, Canada, compared the expected price of potash on the world market for the next 10 years in a competitive strategy against the continuation of the Canpotex strategy.

The study highlighted that in a competitive scenario, the price of potash would decline from $574 in 2011 to $217 by 2015 and then subsequently increase to $488 by 2020.

However, in an uncompetitive cartelised market, the prices will steadily increase from $574 in 2011 to $734 in 2020.)

As predicted, soon after the Russian-Belarusian cartel broke up, potash prices fell from $400 to $300 and are expected to go down further in 2014. Certainly, the Uralkali’s walkout will favourably affect agriculture costs in China and India, paving the way for consumers to demand hefty price cuts.

With the break-up of the cartel, India is aiming for an 11 per cent discount off already agreed deals for the rest of 2013, thereby saving more than $90 million.

China does not want to pay more than $300 for new contracts for the second half of 2013 and 2014. However, whether the break-up will last is yet to be seen.

Given the prices that India and other countries have been paying for the import of potash, it is time to investigate further and take action against this global cartel under the enabling provisions of the domestic competition law.

Export cartels, while being exempt under domestic competition laws, do exploit the domestic market as well. The Russian firms, Uralkali and Silvinit, have faced the ire of the Russian competition authority, the Federal Anti-monopoly Service.

In 2010, they were each fined heavily for charging “monopolistically high” prices to Russian farmers. Uralkali was to pay €3.64 million and Silvinit around €1.78 million. They pleaded innocence saying their main market was abroad.

Quite often, when cartelists get caught they explore a merger so that whatever they do is not actionable. When Uralkali and Silvinit decided to merge, perhaps the Russian authority did not find it anti-competitive.

What is clear is that influential politicians are behind the two firms. However the Chinese, using extraterritorial powers, stepped in and cleared the same on the condition that the merged entity would maintain its level of sales and pricing in China.

Even the Competition Act, 2002, in India empowers the Competition Commission of India (CC) to take action against any anti-competitive practices happening outside India but having an impact on India’s markets. In spite of a preliminary information report by CUTS to CC, it did not act.

But that was not the only effort made. Even the Ministry of Fertilisers and Chemicals sent a reference to CC to take action and cooperate with China under a bilateral MoU, but CC pleaded their inability to investigate and closed the matter.

Lack of interest

Now that part of the international cartel has broken up, we are stuck with signed contracts valid until January 2014, and can only plead for discounts.

If CC had even initiated an enquiry, the Russian suppliers would have been more sympathetic.

Perhaps, the Indian importing company’s officials too are not interested in pursuing the matter vigorously.

In the past, Indian negotiators have requested a 10 per cent discount on spot prices and claimed that if they cannot make a deal between $445 and $450 they will investigate other options.

However, confident about the power of the cartel, Bill Doyle, CEO of Potash Corp., reportedly said that he doubted there would be a long-term boycott from India.

China, on the other hand, has been getting more attractive deals than India, given its bargaining power and strong stand.

Hence, even if the prices of potash have gone down recently, its long-term impact is yet to be seen.

The country will have to take steps to curb global cartels. CC needs to take action soon. Unlike China, India is totally dependent on imports for its requirements of potash.

Published on September 17, 2013

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