Cashing Potash

by Mr. Shivam Sinha, B.A., LL.B (Hons.), 2009 JGLS

Introduction

“Cartel is an agreement among competitors not to sell their product below a fixed price that will generate monopoly profits for the parties to the agreement.”

Another definition provided by Competition Commission of India (“CCI”) is “Cartels are agreements between enterprises (including association of enterprises) not to compete on price, product (including goods and services) or customers. The objective of a cartel is to raise price above competitive levels, resulting in injury to consumers and to the economy. For the consumers, cartelization results in higher prices, poor quality and less or no choice for goods or/and services.” Cartels are formed to maximize profit and maintain market standing. There has been a cartel operating in potash market which has come to light recently as it has affected the global potash trade. Though cartels are not harmful every time, but in this particular scenario, they are.

Potash Cartel

The main stakeholder in this cartel operating in Canada is Potash Corp., which is the largest manufacturer of potash in the world. Mosaic and Agrium, together with Potash Corp. have formed a firm called Canpotex that exports nearly 35% of the total potash exports in the world. This works as a cartel for them and on similar lines works Belarussian Potash and Co., which is the firm used by Belarus and Russia (second largest exporters of potash in the world i.e. 30%). This can be termed as ‘conscious parallelism’ i.e. “decisions by competitors to charge same price, to adopt the same pricing system or to engage in some other kind of conduct, the most troublesome case being what has come to be called ‘oligopoly pricing’ or the consciously parallel decisions of a few dominant sellers in an industry to maintain the same high noncompetitive price.”

Potash market has been working as a duopoly i.e. two firms operating and dominating the market. The combined market share of the two geographic markets sums up to 70% of the total global exports. Recently, there has been decline in the demand of potash around the world, the cartels have reduced the production and escalated the prices approximately to the tune of 400% since 2008 in order to maintain domination and profit.

Establishing the Antithetical Relationship

“Under a competitive scenario, the price of potash would decline from $574 in 2011 to $217 by 2015 and would subsequently increase to $488 by 2020. With an unchanged Canadian cartel policy, the price of potash will steadily increase from $574 in 2011 to $734 in 2020. On average under the current cartel scenario the price of potash would be doubled or $321 more expensive per ton than under the competitive scenario from 2011 to 2020”

In view of the above, it is evident that the formation of the aforementioned cartels has severely affected the prices of the potash worldwide and will continue to do so if left unchecked. Cartels are antithetical to competition. They prove to be a roadblock in the efficient working of the market. 

The price differences between competitive scenario and cartel scenario shows the extent of exploitation by the Canadian firm, Canpotex. Since Canada has no antitrust provisions with regard to exporting norms, it has not paid any heed to this situation. Moreover, due to a recent refusal of a takeover bid, Canadian Government has fueled concerns worldwide as it refused BHP Billiton (an Australian firm) to buy Potash Corp. This acquisition (if allowed) would have affected the cartel in place and would have led to effective competition that would result in heavy loss of revenue which Canada has been generating through this industry.  Canada seems to have given a green light to such practices and by ignoring the effects being caused worldwide. As per Section 45 of Canadian Competition Act “No person shall be convicted of an offence under subsection (1) in respect of a conspiracy, agreement or arrangement that relates only to the export of products from Canada”. The law clearly protects any such establishment in place and there seems to be no solution until amendments are made.

Indian Scenario

India is an agrarian economy since time immemorial and even today when India is among the fastest growing economy in the world, 72% of India’s population is in the agriculture sector which accounts for 21% of India’s GDP (gross domestic product). Being an agrarian country, fertilizers are imported at large scale and subsidies are also provided on the same. The global potash cartel which is centered in Canada, Russia and Belarus, has resulted in steep rise of potash price import. This increase in prices has majorly affected the developing countries such as India since it has been striving hard to become self-sufficient in food production.

“CUTS, a consumer advocacy firm, have appealed to the competition watchdog to undertake an investigation under Section 19 of the Competition Act. Under the Competition Act, the CCI can initiate action for an act taking place outside India that has or is likely to have an appreciable adverse effect on competition in India vide Section 32 of the Competition Act (applying the effects doctrine) against the global potash cartel.” India will be majorly affected if steps are not taken to breakdown these cartels it is still at a developing stage and requires potash on a large scale.

“There is no international competition law prohibiting export cartels but competition law can be used by large developing countries to mitigate the cost of international anti-competitive cartels or transactions that victimize them.”

India can use its extra territorial reach under Section 32 of the Competition Act in order to rectify the situation at hand but India is in an uncertain position as it cannot utilize domestic laws in place for preventing such activities. This is because neither  can it initiate any action for imposing sanctions without risking further increase in the prices of potash nor can it cut down its imports as it requires potash in large quantities for sustenance.

Further, owing to such non-substitutable needs it recently got into a deal with Canpotex for 1.1 million ton of potash to be delivered in 2014. This dependency has led to protracted existence of such cartels.

“Indian competition law allows the CCI to take action even if such events are not taking place on Indian soil, and this could become a beacon case. Competition law is a relatively new tool in many developing countries and international cooperation between the competition authorities of those countries is still in its infancy, but the attempt by Potash Corp. to eliminate the potential competition and reinforce its grip on a world market so crucially important for agriculture may be the trigger that will spur China and India into action, singly and jointly. If this happens, it could be the beginning of a new era for the governance of world markets.”

If it would have been a competitive scenario, the benefits would have been universal. India would save a lot on its potash imports which could be used efficiently for other developments in the country.

Conclusion

Cartels are a hindrance in free trade and result in exploitation. It is a moral and ethical wrong-doing which proves to be a contrary to the notions of development “Global food demand is expected to increase by up to 80 per cent in the next 40 years as the world's population reaches 10 billion people. That means food production must rise by nearly 2 percent annually, about double the current production rate, and fertilizer will be needed in abundance.”

In the presence of such cartel and absence of any competitive characteristics, exploitation of the one in need is bound to take place. There is an urgent requirement for setting up a global competition body overlooking such scenarios which have little or no solution in domestic laws and cannot be subjected to scrutiny by other nations. It can be adequately established from the scenario above that cartels are major hurdle towards fair competition and can be regarded as antithesis of competition.