12/14/2010 11:03:00 AM

The Chinese Are Coming! Oh, Sorry, I Meant the Albertans

From aiCIO Magazine: With 52% of world reserve supply, the Canadian government, along with the Potash Corporation of Saskatchewan and two minor producers, collude to keep potash prices artificially high. Editor-in-Chief Kip McDaniel reports.

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Mexican drug cartels. The Middle Eastern oil cartel. A Canadian potash cartel. Wait—a potash cartel? Really?

Really. With 52% of world reserve supply, the Canadian government, along with the Potash Corporation of Saskatchewan and two minor producers, collude to keep potash prices artificially high. With the Saskatchewan provincial government deriving a significant segment of its revenue from royalties based partially on price, there is a strong incentive, both economic and political, to maintain this pricing power. However, with the world markets demanding increasing amounts of this basic fertilizer ingredient, it was only a matter of time before pressure came to bear upon Canpotex, the front organization for the cartel—which is exactly what Australian mining conglomerate BHP Billiton applied when it offered $39 billion for Potash Corporation this autumn.

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In stepped the Chinese. A massive consumer of potash, China quickly ordered state-owned Sinochem to explore an offer for the firm but, as with the BHP offer, Canadian backlash was fierce. The Saskatchewan provincial premier was against any foreign sale. The federal government waffled. Then: rumors of sovereign wealth and pension saviors. Chief Investment Officer Leo de Bever of AIMco, the pension and sovereign wealth fund manager for the province of Alberta, at first denied interest in entering into a deal but, by late October, had recanted and was reported to be in talks with other Canadian pension managers in an effort to support the Sinochem bid. This arrangement came to nothing—Sinochem dropped out of the bidding, and the Canadian federal government blocked BHP's bid on grounds of national interest—but it did highlight the fact that sovereign wealth funds, as well as large pension funds, are increasingly being called upon to protect both national and private interests.

“[Sovereign funds] have a long-term horizon—companies seeking capital want this,” says Guy Gresham of BNY Mellon's Depositary Receipts group, which recently conducted a survey showing that nearly 50% of companies polled had met with sovereign wealth funds in the past year. “They don't necessarily want to take an activist approach, and they are sticky.” While pension funds have explicit liabilities, the larger public funds—Canadian ones in particular—are managed similarly to sovereign capital in that they embrace the illiquidity premium and are extremely long-term in focus. Despite the failure of the potash deal, it should come as no surprise that companies are seeking such steady capital.

Yet, when those companies are tied to national interest—or, in some cases, are essentially wards of the state—dangerous territory is being breached. “Clearly, it's a bad situation when a fund is asked to do something for a government, void of risk and return calculations,” says pension governance guru Keith Ambachsteer, who had a hand in the creation of the now-lauded Canadian pension giants CPPIB and Ontario Teachers', among others. “An absolutely critical buffer is an independent board,” —which is a staple of many Canadian funds—"and AIMco, their board is no slouch, so the idea that they'd kowtow is just laughable.” Benefits or drawbacks aside, Ambachsteer says, pension and sovereign funds should expect to be courted for their stable capital—but be the suitor an innocent investment or the world's most innocuous cartel, be wary of their requests, and motives. You're a fiduciary, after all.