The Rising Influence of Rising Affluence

[DewDiligence]

BHP Rebuff Is Latest in Protectionist Wave

http://online.wsj.com/article/SB10001424052748704353504575596701384301106.html

›NOVEMBER 6, 2010
By PHRED DVORAK and ROBERT GUY MATTHEWS

Canada's rejection of the year's biggest mergers and acquisitions bid has thrown a different type of protectionism onto the global stage—the struggle to safeguard natural resources.

Canadian Industry Minister Tony Clement shocked markets Wednesday by saying he didn't think Anglo-Australian miner BHP Billiton's $38.6 billion bid to take over fertilizer firm Potash Corp. of Saskatchewan would be good for the country. Though Canada hasn't disclosed the reasons behind the move and says the door remains open to BHP, the decision was particularly surprising since Canada has been a vociferous denouncer of protectionism, castigating the U.S. this year over its "Buy America'' provisions and cobbling together free-trade agreements from Colombia to Jordan.

The Canadian coolness on the BHP-Potash deal appears to dovetail with what mining-industry experts call a growing global tendency for countries to hoard, guard and extract higher tariffs for use of their natural resources. In the past few years, countries have thrown private companies off their mining land, applied large tax increases on extracted metals, and renegotiated contracts in an effort to tighten their hold on everything from gold to oil on their territory.

"Resources and resource nationalism have become major items on the geopolitical agenda,'' said Rio Tinto's chairman Jan Du Plessis, on an earnings conference call in August.

Efforts to lock down national resources come at a time of broader concerns, amid global financial crisis, that some trade barriers may be reconstituted. Some countries see a protectionist hand in the ongoing global "currency wars"—alleging that China, or the U.S., want to keep national currencies weak to help make their own exporters more competitive. The currency issue will top of the agenda of next week's summit of the Group of 20 leading nations in Seoul.

Protecting national resources can be particularly important as prices for commodities from iron to copper soar on the back of expanding demand from economies like China, India and Brazil. Some countries are concerned they will be short of materials such as potash—a crop nutrient of which Canada is believed to control half of the global supply—and rare-earth minerals, which China largely controls. Beijing officially discourages foreign investment in certain industries including mining rare-earth elements.

"If you're dealing with a strategically important national resource, you have to play it differently," says Mel Cappe, a former top-ranking civil servant who now directs the Montreal-based Institute for Research on Public Policy.

Protectionism has also been driven by economic turmoil, says Tom Whelan, a partner at Ernst & Young's mining and metals practice. "The real simple reason is that the global financial crisis resulted in so many governments on the brink, with significant budget deficits," he said. With recent spectacular earnings, he said, mining companies have "become a target to replenish these national treasuries."

In a study released last month, Mr. Whelan found that nationalism was the fourth-highest strategic business risk within the mining sector in 2010, up from the ninth in 2009.

Last year, the West African country of Guinea tossed miner Rio Tinto from the northern portion of its iron-ore development, complaining the miner wasn't working fast enough to bring in tax revenue from the sale of iron ore. Australia famously proposed raising its tax on some mining profits to 40% this year, sparking resistance from the country's mining giants and setting the stage for the ouster of its prime minister.

Oil is another resource often thought too precious to subject to normal investment rules. Since the 1990s, Brazil's government eased the path for most foreign investment to spur economic growth. But it moved to erect new walls around its growing domestic oil industry after making massive deep-water oil discoveries off the coast of Rio de Janeiro a few years ago.

Last year, for example, Brazil's President Luiz Inácio Lula da Silva announced a new law that would give state-controlled oil company Petroloeo Brasileiro a dominant role in developing the new fields while relegating foreign oil firms to supporting roles.

Brazilian government officials say the sheer size of the giant oil find makes it a special case that must be treated differently.

Canadian politicians are using similar arguments in their opposition to a Potash sale. Canada has approved the takeovers by foreign companies of its biggest miners of nickel, copper and aluminum, gaining a reputation internationally as a country open to investment. But Potash controls more than one-fifth of the world's reserves of potash; its home province of Saskatchewan sits on roughly half.

Control over that much of the mineral gives Canada a leg up in global markets—particularly since the country is a big supplier of foodstuffs as well, Agriculture Minister Gerry Ritz argued in Parliament on Thursday. Ceding control to Australia would be especially painful, he said.

"Australia is a major marketer of a lot of the same foodstuffs that Canada has," Mr. Ritz said. "For it to be able to go to the Indias and Chinas of the world and say that it now controls their fertilizer too, I think would have had a very detrimental effect'' on Canada.

The sale was complicated by the long-simmering feeling that Canada had lost too many of its star companies to foreign firms, and not protested when foreign-investment rules abroad prevented its own companies from acquiring others, said John Manley, a former Industry Minister who now heads the Canadian Council of Chief Executives.

"There's a strong sentiment in the Canadian business community that we've been patsies," he said. Mr. Manley says he's an advocate of an open investment process to make sure it's not railroaded by politics.

In the U.S., one of the most well-known cases of protectionism came in 2005 when Chinese oil company CNOOC Ltd. made an ambitious $18.4 billion bid for Unocal Corp. The move of the Chinese government-backed company drew the attention of Congress and other prominent politicians.

The backlash caused CNOOC to drop its bid, and Chevron Corp. was able to make its own move for Unocal at a lower price.

In Australia, eyes are on another Canadian-Australian agricultural deal: Agrium Inc.'s $1.1 billion bid for AWB Ltd., which topped an agreement AWB already had with fellow Australian company GrainCorp Ltd. AWB is Australia's largest wheat exporter.

The deal has already received approval from Australia's foreign investment review board and it would be unprecedented for the Australian government to step in to block a deal at this point. Such a move is not expected.

But Agrium and AWB are keeping an eye on Australian politicians and the government to ensure there is no backlash against the deal as a result of Canada's rejection of BHP's Potash bid, people familiar with the matter said.‹