Sometimes, things can just fly out of left field and hit you in the head. That seems to be what happened on July 30, and I'm pretty sure both Premier Brad Wall and Finance Minister Ken Kravetz are reaching for a bottle of Tylenol.
Then again, it might be a bottle of Scotch, or Pepto-Bismal.
The financial press went nuts on that day.
The Financial Post's lead headline was "'The end of the potash world as we know it:' Shares plummet on the threat of price pullback." The story leads off by saying "Shares in North America's three main potash producers are down as much as 23 per cent after the breakup of a Russian marketing group threatens a sharp drop in prices."
The FP went on to say, "Russian company OAO Uralkali plans to break up one of the two main potash marketing groups to boost its sales. The result is likely to be a sharp drop in global prices as the industry's oligopoly-like structure is shattered and more supply hits the market," and that "Even Uralkali's chief executive said that prices could fall below US$300 a tonne, according to reports. By comparison, they are a little over US$400 right now."
This had me looking up what the province based its financial assumptions on in the 2013 budget. For 2013, the province is expecting an average of US$388.99 per tonne for KCL, and $413.84 for 2014. It sounds like those numbers just flew out the window.
The same budget estimated $519.9 million in potash revenue for 2013-14. This was down from $705 million it estimated for the previous year, and the $397.4 million it forecast last spring that we would actually get.
When the province does its November budget update, you can be certain there will be cutbacks somewhere.
There will be some relief from oil, however. Oil prices are up right now. As I type this, the posted price for WTI is US$104.70 per barrel. And with our dollar trading at 97.15 U.S., we actually get a little boost. With the budget assuming oil at US$92.50 for 2013 and US$94.50 for 2014, the province should get a little more than expected.
Oil revenue also makes up a much larger portion of the budget. Based on those numbers, the province was estimating oil revenue to come in at $1.441 billion for 2013-14.
The big question is this: can a 10 per cent uptick in oil prices make up for a 25 per cent decline in potash prices? Even if it does, the chances of a sizeable surplus this year just dropped dramatically. If we do have a surplus, expect it to be razor-thin, essentially for show.
The broader question is what will happen to all the potash development that has been on the books? You couldn't swing a dead cat in rural Saskatchewan without coming across another planned mine. Expansions that are well underway, like those Potash Corp has been working on, will likely be completed. But what of the new mines under development, like BHP Billiton's Jansen project? Bloomberg reported on June 6, well before the current firestorm, "BHP Billiton Ltd. (BHP)Chief Executive OfficerAndrew Mackenziesaid the Jansen potash project inCanadamust meet 'certain criteria' if it's to proceed as the world's biggest mining company cuts billions of dollars ofcapital spending. Potash 'is a great option but it's just an option,' he said today (June 6) in a speech in London at the annual dinner organized by the Melbourne Mining Club."
What about K+S north of Moose Jaw? Or the other mines that have been talked about? There's been talk of a solution mine southeast of Regina. Will we see these projects suddenly grind to a halt as their economics get shaken to the core? As other sectors have found out in recent months, the big miners are more than willing to shut down projects all over the world if the numbers stop making sense.
For the past few years, several drilling rigs have been working on potash exploration in Saskatchewan. Today, according to Riglocator.ca, there's just one, for K+S. BHP had been drilling up a storm in the Melville area, but I see that is now over. They don't have a rig in the Jansen area, either. Perhaps they are done both drilling programs, but perhaps not.
This is where the impact will be - not so much on our current finances, but rather the provincial economy for decades to come. That's what might keep the premier up at night.
- Brian Zinchuk is editor of Pipeline News. He can be reached at [email protected].
