Photo Jonathan Blair

Wednesday, March 20, 2013

Fertilizers (yes) and international affairs: the Argentina-Brazil potash feud

At the beginning of March, mining giant Vale announced that it would close its massive Rio Colorado potash project in Argentina. The move was justified strictly on economic grounds: even though the company had already invested some $2bn in the project, the size of the investments required and the problems created by inflation and an overvalued currency were said to have forced it to cut its losses and leave. Predictably, Argentina's government was outraged but the move was well-received by markets that saw the whole venture, well, as an expensive adventure. The stock in fact went up after the announcement.

On the surface, in other word, run of the mill behaviour by a run of the mill multinational. The hitch is, Vale is anything but a run of the mill multinational. While formally headquartered in the Netherlands, it is in fact Brazilian and a strategic tool that the Brazil's government is keen to use to project and protect its interests in the world. Through investments by a public sector pension fund it controls (Previ) and by its National Bank for Economic and Social Development (BNDES), and also via its influence over the company's largest private sector equity holder and Brazil's second largest bank (Bradesco), the federal government exerts a tremendous influence on the company. This became clear in 2011, when its then-CEO, Roger Agnelli, was forced to resign by President Dilma Rousseff, following rising tensions about patterns of investments that, she and her predecessor Lula, felt neglected the domestic scene.  

The Rio Colorado investment had a strategic quality that went well beyond Vale's typical activities in the iron, nickel, manganese, copper and coal businesses. Potash, with phosphorus and nitrogen, is one of the three fundamental fertilizers on which agriculture depends. It is also increasingly scarce and its production highly localized: 60% of global production is concentrated in only three countries (Canada, Russia and Belarus) and 80% in the top five (with China and Germany added). Brazil, which derives a larger part of its exports from agricultural goods than any other major economies, only produces 1.5% of global output and thus has to import 90% of what it uses. On that increasingly tight market, it competes with the whole world, but especially with China, India and the United States.

Once completed the Rio Colorado project was planned to be under exploitation for 50 years and it would have made Argentina one of the world's four largest potash producers, with about 12% of current global output (4.3/34.4bn tons). For Brazil, it would have represented a secure supply of one of the few strategic commodities it does not have aplenty, and certainly one of the most critical to its present and—given global food price prospects—future export revenue.

And yet, Vale decided to let it go, most probably for good given the reaction the move is generating. Indeed, the Argentinian government is apoplectic and has announced that they would sue for compensation and look for new investors. With Buenos Aires knowing very well that no such decision by the company could have been taken without, literally, presidential approval, the termination of the project will also poison a relationship with Brasilia that is already rocky.

From all this, three issues of note, from where we sit:

1) The economics of the project and the general prospects of the Argentinian economy must truly have looked awful to Vale and Brazil for such a decision to have been taken. And, thanks to years of hyper-inflation and intimate relations with their neighbours, few global investors are as difficult to shake up or as knowledgeable about Argentina as Brazil's. In other words: don't bet your pension fund on Argentina.

2) For Canada, the world's largest producer, this is probably good news. Brazil, already a good client of Saskatchewan's Potash Corp, will be even more dependent on it and the disruption to the project will keep prices high.

3) Finally, this is just further meat for the grinder of people like me, who think that Latin America is really dis-integrating and that behind all the talk of solidarity and converging interests, there is little of substance really going on.