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Why Saskatchewan’s economy could be rocked by Potash shakeup

Why Saskatchewan’s economy could be rocked by Potash shakeup

Saskatchewan could be hit hard by a Russian-led shakeup in the potash business, according to economists assessing the potential damage to the Prairie province, which is the world’s second-largest producer of the crop fertilizer.

But Saskatchewan Premier Brad Wall downplayed concerns Thursday insisting there’s no need to push the “panic button” while pledging to maintain one of the few balanced budgets on the continent.

“We need to be measured. We need to stay calm,” Wall told John Gormley, a popular radio talk show host in Saskatoon.

Concerns about the province’s finances come after Russian potash producer OAO Uralkali announced this week that it would abandon Belarusian Potash Co. (BPC), which effectively breaks up the world’s largest potash cartel.

BPC is the marketing organization that exported potash for Uralkali and Belarusian producer Belaruskali. The dispute came after Uralkali alleged its partner violated export agreements by making extra deliveries. Uralkali also wants to sell potash to emerging markets on its own.

That news slammed big North American players including Potash Corp. of Saskatchewan, The Mosaic Co. and Agrium Inc., which saw their share prices tumble. They are part of the marketing group Canpotex Ltd., which happens to represent about 25 per cent of global potash exports, while BPC once accounted for as much as 43 per cent of the market.

The two cartels usually follow each other in terms of pricing, but without the BPC group, the supply and demand scale could be thrown off and Canpotex could be the one badly hurt.

The move is expected to trigger a global price war in the commodity as Uralkali predicted a price plummet of up to 25 per cent – or by about $100 (U.S.) per tonne, to around $300, as it tries to move product.

That’s bad news for Saskatchewan, according to research note circulated by Toronto-Dominion Bank on Thursday.

“Even a price decline of 10-15% would leave a significant mark on the market and Saskatchewan economy,” wrote TD economists Jonathan Bendiner, Derek Burleton and Dina Ignjatovic.

They peg real output from the potash industry at 2 per cent of Saskatchewan’s economy, but warned it could dampen the investment climate and capital expenditures.

In real dollars, royalty revenue from potash was expected to pump $520-million into provincial coffers in the next fiscal year, or about 4.5 per cent of overall revenue. But potash prices of $300 (U.S.) a tonne, could mean revenue $150-million below forecast, according to the TD economists, who also pointed to the potential for lower tax revenue as potash prices slide and activity slows.

“Under this scenario, Saskatchewan’s position as one of the few provinces in a surplus position would be put at risk,” they wrote.

Impact on Canadian economy

Royal Bank of Canada assistant chief economist Paul Ferley calculated that the province’s economic growth cut by 1 percentage point. RBC had projected economic growth for Saskatchewan at 2.9 per cent for 2013.

The impact to the Canadian economy appears less damaging since potash accounts for just 0.1 per cent of real GDP, and potash exports represent between 1- and 1.5-per cent of the country’s overall export picture.

Capital Economics economist David Madani said in note that the “anticipated slump in potash prices should have only a minor impact on Canada's economy.”

Meanwhile, Avery Shenfeld, chief economist with CIBC World Markets, suggested significant declines in potash volume could see Canada’s economic growth cut by about 0.1 per cent, or 0.4 per cent at an annual rate.

“Potash volume swings can indeed have a meaningful, if not massive, impact on Canadian quarterly GDP data,” he wrote.

Back in Saskatchewan, Wall remained confident that investment would continue, and along with it, job creation. He also called any price reduction in potash manageable since it represents only a small portion of the provincial budget.

“Oil revenues are higher than we budgeted – and not insignificantly so - and the dollar is a little lower than we budgeted, and that actually is good for our budgeting as well,” he said.

“We will have a balanced budget,” Mr. Wall added. “One of the only ones in North America.”