The hot news now is the BHP Billiton's unsolicited offer to buy Canadian fertiliser company, PotashCorp for $40 bn and PotashCorp taking alternative measures to block the bid. It is not yet clear why fertiliser companies have suddenly become hot favourites for acquisitions and mergers.
A Bloomberg report quaoting experts said that growth in world population necessitates more food production and hence enhanced fertiliser inputs. The global population will swell to 9.1 bn in 2050 from 6.8 bn, according to the United Nations' Food and Agriculture Organisation (FAO).
The report points out that acquisitions and merger talks have increased as rising demand for potash, especially after the US forecast a decline in wheat output because of adverse weather in Russia, Ukraine and Kazhakhstan.
Population has always been increasing at a steady pace, food requirements are also increasing but that alone can't explain the sudden interest in fertiliser industry consolidation. It may have something to do with the way the industry operates--as cartels. And the biggest wory for companies like PotashCorp who are part of the cartel is whether the cartel will break down and they lose control over pricing in the market.
We are familiar with cartelisation in industy and one of the biggest cartels being Organisation of Petroleum Exporting Countries (OPEC) who try to regulate supply and maintain prices. Similarly, there is cartelisation among rubber producers perhaps also in paints and chemicals.
Financial Times reported that PotashCorp has attacked BHP's plan to break away from the cartel-like marketing group it uses to sell its production overseas. Bill Doyle, who has been PotashCorp's chief for more than a decade, suggested BHP's plans were naive. This is an easy business to talk about when you're not in it . . . To blindly produce and produce without regard for the marketplace has been proven to be a bankrupt strategy more than once.
There is perhaps no conclusive evidence that cartelisation works for the benefit of the consumers. In the case of potash, consumers are the farmers who sell their produce, food grains, which is consumed by each one of us. So ultimately each one of us ends up paying more adding to a food inflation spiral.
But for PotashCorp and those forming part of the marketing cartel, they need to look at their bottom lines and value it delivers to shareholders. Before privatisation of state-owned PotashCorp, the company suffered losses due to overproduction, Doyle said and that would be repeated if BHP strategy were to be implemented consequent to its proposed acquisition.
But from a consumer point of view, BHP's acquisition and consequent oversupply may bring down prices of fertilisers and hence global inflation may fall provided that doesn't weaken other fertiliser companies to bankruptcy.
It is not yet clear whether PotashCorp is having the interests of the industry or the fact that it needs a better pricing from BHP and scouting for other possible contenders to bid.
Shares of PotashCorp rose for a fifth straight day, trading as high as $152.10 in New York, reflecting expectations that BHP will either raise its offer or there will be a competitive auction for the Canadian group, Financial Times report said.
Among other companies that may show an interest in the deal are Sinochem, China's largest state-owned chemicals group, Brazil's iron ore mine Vale and and China's Sinofert.
The rhetorical battle between PotashCorp and BHP Billiton over managing supply and pricing policy is being closely watched by the wider fertiliser industry. The change being proposed by the Anglo-Australian miner could force companies to compete on prices on key overseas markets such as China and India for the first time since the creation of the first cartel in 1972, Financial Times commented. High cost fertiliser producers in UK, USA stand to lose out the deal as they would have to compete on cost in future.
There is an obvious conflict between a narrower corporate cause of rasing shareholder value to larger public benefit of getting food at cheaper prices in the PotashCorp vs BHP Billition debate. However, there is also no conclusive evidence that consolidation rather than dispersed competition in industry ultimately benefits consumers.