Potash Necessary for Canada’s Economy

Heralded for its growth-supporting properties in food crops worldwide, Canada’s potash supply is also critical to achieving economic resilience and growth during challenging global growing conditions. In these rather austere economic times, both the government of Canada and the province of Saskatchewan have been hoping for more fruit fromone of their most cherished resources.

In 2010, when Canada’s industry minister rejected BHP Billiton‘s (NYSE:BHP,ASX:BHP,LSE:BLT) offer to buy PotashCorp (NYSE:POT,TSX:POT) for $38.6 billion, he did so on the claim that selling off this world-class resource was of no net benefit to Canada as a whole. But in 2012, the potash industry has failed to provide the anticipated benefit to the country, and falling potash sales have been blamed for Canada’s 0.2 percent real GDP growth decline this February, according to a recent report by Statistics Canada.

“Potash mining was down 19% as a result of the closure of mines in Saskatchewan in response to weak world demand,” the report brief stated.

Saskatchewan is relying on potash to be a major contributor to its economic growth in 2012, with BMO Capital Markets projecting 2.9 percent growth for the province. Potash growth in the province has spurred economic growth in recent years; potash production doubled in 2010 and grew by 14 percent last year, which resulted in 4.8 percent GDP growth in 2011.

“Investment in the [potash] sector remains strong, with BHP Billiton’s Jansen mine on track to begin production in 2015, and K+S moving forward on a $3.5-billion investment in its Legacy Project,” BMO economist Robert Kavcic said in an interview with the Leader-Post.

Recent weeks of intense planting in North American markets have begun to chip away at growing stockpiles of potash as farmers seek to fill shortages experienced in global corn and soybean markets.

These events have even translated into signs of recovery within the potash space. News of rapidly evaporating North American potash inventories was reported by Reuters earlier this week, with stockpiles falling by 455,000 tonnes in April to below 3 million tonnes for the first time this year.

But there is still much to be done, as potash inventory levels are currently 25 percent above the prior five-year average, according to the latest industry data.

The politics of resources

A number of Canadian politicians have voiced concern about the role of resource development in the federal economy, the most recent example being federal New Democratic Party leader Thomas Mulcair, who raised the ire of Saskatchewan Premier Brad Wall by saying that the resource boom in Western Canada has inflated the dollar and bludgeoned the manufacturing base – particularly in the east – and is moving the country away from a “greener” future.

Wall feels ignoring the role that potash – and resource development more broadly – is playing in Canada’s current economic growth is “very, very divisive for someone who aspires to be the prime minister.”

Mulcair’s declaration that the country is suffering from “Dutch disease” has been welcomed by some in manufacturing-focused economies, but British Columbia Premier Christie Clark – whose province is experiencing a resource boom – has labelled Mulcair’s assertion “backwards.”

What outcome this political posturing will have on the potash industry is uncertain, but the impact that central resource development will have on Saskatchewan’s near-term future is obvious. PotashCorp’s CEO, Bill Doyle, has described his company as having “a thousand years of reserves” that can meet world demand for the next century merely from the mine shafts it has already sunk.

The question is how fast these massive reserves will be brought to the surface.

Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company or resource mentioned in this article.