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The Real Reason BHP Billiton Wants Out of Saskatchewan's Potash Cartel

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Mixed up in the politics and national pride is a story we hear more and more of as one country becomes the brass ring every company is reaching for.

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While the infamous OPEC controls one-third of the world's oil supply, there's another, equally powerful export cartel that is far from a household name.

Formed in Saskatchewan in 1972, the group is called Canpotex, and its three members -- Potash Corp. (POT), Agrium Inc., (AGU), and Minneapolis-based Mosaic Co. (MOS) -- control more than a quarter of the world's potash (the base material for 80% of the world's fertilizer).

BHP Billiton (BHP), the world's largest mining company, has its sights set on Potash Corp. and seemingly will not rest until it gets it. On Wednesday, we will find out if the Canadian government is prepared to allow BHP to move forward with a hostile takeover bid.

BHP must demonstrate that acquiring the company will be in the best interests of Canada. This has been the subject of much debate and hand-wringing, as politics and patriotism have played major roles since the saga began some months ago.

During the course of the saga, BHP has made it clear that, if its bid for Potash Corp. is ultimately accepted, it will break from Canpotex and market its product on its own.

Professor Michael Trebilcock, Co-Director of the Law and Economics Program at the University of Toronto, wrote in Canada's Financial Post this past weekend:

"Whatever the strengths or weaknesses of the hostile takeover bid by BHP Billiton Ltd. for Potash Corp. of Saskatchewan Inc. as a business proposition for the various parties involved, from a public-policy perspective one alleged disadvantage of the bid should be dismissed out of hand: that it is likely to disrupt or even terminate Canpotex, a 40-year-old potash cartel based here in Canada. This is no disadvantage but a benefit.

"If the cartel were a purely domestic cartel selling potash into the Canadian market, these restrictions would attract criminal and civil liability under the Canadian Competition Act (recently strengthened in this respect) and expose the parties to fines running potentially into tens of millions of dollars and the possibility of prison sentences for the executives involved. The argument that cartels and any other form of monopoly may result in higher profits and hence potentially higher revenues for government would be regarded as a legally irrelevant, indeed laughable, justification for such a cartel (i.e., indeed would justify the repeal of all our competition laws).

"However, in the case of Canpotex, all of its output is sold into foreign markets, mainly as fertilizer for agricultural production in developing countries. Under the Canadian Competition Act (as with competition laws in a number of other industrialized countries), an exemption is provided for export cartels. This has provided legal shelter against prosecution or civil liability in Canada for cartels such as Canpotex. However, it provides no legal immunity from prosecution or civil liability in countries to which Canpotex exports its products, including the 60 or so developing countries or countries in transition from command to market economies that have adopted competition laws in the last 15 years. Indeed, over this period, Canada (along with other jurisdictions such as the United States and the European Union) has become increasingly aggressive in the prosecution of international cartels selling their output into their markets, often resulting in fines in the tens of millions of dollars, whether or not these cartels enjoyed any export-cartel immunity in their home countries."

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