The case, which was initially dismissed last September, alleges that foreign potash producers “created a cartel, took steps outside the US to drive up the price of a product that is wanted in the US,” the court said in its decision.
Agrium (TSX:AGU), PotashCorp (TSX:POT), Mosaic Co (NYSE:MOS) and four Russian and Belarusian potash producers are the target of at least two plaintiffs who claim the companies aligned business conduct in the US and three other markets (Brazil, China and India) between 2003 and 2008.
During the five-year period, imported potash prices increased by 600 percent while demand fell during much of the period (not including Asia) while the defendants carried excess capacity, the plaintiffs claimed.
In the initial 2011 Court of Appeals hearing, plaintiffs gave general and specific examples of the activities it perceived as collusive actions. One example referred to actions taken during the last two months of 2005 by Mosaic when it announced a temporary 200,000 ton reduction in potash production shortly after PotashCorp announced the shutdown of three of its mines, removing 1.34 million tons of potash from the market.
The plaintiffs claimed these actions did not reflect the activities of companies acting under free market rules.
The ‘cartel cliam’ falls under the US Foreign Trade Antitrust Improvements Act which extends US antitrust law to the conduct of foreign firms directly impacting US imports. At the upcoming hearing, the plaintiffs will need to demonstrate a plausible “direct, substantial and reasonably foreseeable” connection between the alleged foreign anticompetitive activity and the domestic potash market in order for the case to be successful, Washington, DC antitrust lawyer Hauwa Otori blogged in a 2011 commentary.
Demonstrating that the companies coordinated their activities, and not just acted independently in response to an oligopolistic market, will be difficult.
“They want to prove the Canadians were colluding with the Russians? I don’t think so. It’s just an oligopoly,” the Financial Post quoted Chris Damas, an independent analyst.
Can juniors bust the cartel?
Losing the case would be dramatic for the industry’s major producers with potentially severe financial and reputational blowback. But the addition of junior greendfield projects could have just as big an impact on the potash market.
A recent report by agricultural market consultants Rabobank said that new players in the potash market will add additional supply and could reduce the marketshare of majors like PotashCorp.
In one scenario Rabobank outlined, potash output could grow to 107 million tonnes by 2020, up from the current 78 million tonnes. That would create 59 percent excess capacity in the open market, assuming China, Brazil and India saw a slight decline in import demand.
Western’s CEO, Patricio Varas, believes new market “should make for a more competitive environment by allowing supply/demand fundamentals to dictate pricing of this vital commodity,” he was quoted saying in a recent Vancouver Sun article.
But PotashCorp CEO Bill Doyle recently stated he did not see any new potash projects coming online in the next five years due to the timing required to bring new production online. Instead, Doyle believes any new production during then next five years will instead come from brownfield expansion from existing projects, comments that were not well received by companies aiming to reduce the market dominance of entrenched producers.
Western’s John Costigan believes Doyle’s comments ignore the recent start of construction at K+S (FRA:SDF) greenfield Legacy project in southern Saskatchewan that broke ground late last month as well as ignoring the nature of Western’s Milestone project.
“Our Milestone project is a solution mine that can in general be built in 4 years. We’re just building a plant on surface,” Costigan told Proactive Investors, adding: ”[Doyle] must be pretty terrified to ignore something that is right in front of his eyes.”
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company or commodity mentioned in this article.