Why BHP Will Fail Once Again in Acquiring PotashCorp

If rumors are to be believed, BHP Billiton is about to make another run at acquiring PotashCorp of Saskatchewan , and shares of the fertilizer giant rose 3% the other day on the speculation. Investors, though, shouldn't put too much stock that the Anglo-Australian mining concern will be any more successful than it was back in 2010, if it even tries at all, though the Globe and Mail says the landscape may have shifted enough that a combination of the two might now be possible.

Source: PotashCorp.

BHP's previous attempt was killed by the Canadian government after the miner incautiously said it would market the fertilizer on its own after it withdrew from Canpotex, the North American potash marketing group from which the government receives a substantial stream of revenues.

Since then, however, the industry was launched into turmoil following the breakup last year of Canpotex's rival, the Belarusian Potash Corp. cartel, when Uralkali made a bid for market share by separating from its partner Belaruskali. The price of potash tumbled in the aftermath and trades now just above $300 per tonne, down from the $424-per-tonne price it commanded in 2012 and below even the $332 per tonne at the end of 2013.

Because of its failure to buy PotashCorp, however, BHP moved on to establish the fertilizer ingredient as its "fifth pillar" of support by buying the massive Jansen deposit in Saskatchewan, right in PotashCorp's backyard. When it becomes operational, Jansen is expected to have an output of 10 million tonnes a year for more than 50 years, making it one of the world's largest potash mines.

Potash deposits in Saskatchewan. Source: PotashCorp.

Canada with some 10 billion tonnes of recoverable potash deposits, is home to half the world's reserves, and almost all of them are located in Saskatchewan. Russia is a distant second, with around 2 billion tonnes and Belarus comes in third at 1 billion tonnes. To further amplify the concentration, only a handful of companies globally control the vast majority of its production, and PotashCorp is the biggest.

BHP is in the process now of shedding assets like nickel, manganese, and aluminum so that it can better focus on iron ore, copper, coal, petroleum, and potash. A combination of Jansen and PotashCorp's mines in the region, which produced 7.8 million tons in 2013, would give it even greater clout and control over the fertilizer ingredient.

Source: PotashCorp.

Potash isn't traded on exchanges like other commodities, but rather its price is determined by negotiations between buyers and sellers. With far and away the largest and best reserves of potash in the world, a combined company would be able to exert undue influence that many market regulators would undoubtedly look askance at.

The industry has already gone through lawsuits alleging price-fixing schemes. Even disposing of lesser mines would not lessen the impact a merger of these two giants would have on the industry, one beyond even the scope of a reunion of Belarusian Potash Corp.

It may be fun to imagine these two joining forces, but even with the changes that have occurred in the industry, it's hard to believe the merger would be allow to pass muster.