Recent postponements of two multibillion-dollar potash projects in Saskatchewan have some people thinking the unthinkable: is the potash boom over?

Some analysts think so. They believe that falling commodity prices, caused by China’s weakest economic growth in a decade, is forcing the world’s biggest mining companies to pull in their horns.

Vale SA, the Brazil-based mining giant, was the first to announce the postponement of its proposed US$3-billion, 2.9-million-tonne-per-year solution potash mine at Kronau, 30 kilometres southeast of Regina.

Then, Australia-based BHP Billiton Ltd., the world’s largest mining company, announced it was delaying a production decision on its proposed $12-billion, eight-million-tonne-per-year Jansen Lake project, east of Saskatoon.

So, it was no surprise when Premier Brad Wall called a news conference on the same day in August that BHP had announced plans to hold off making the production decision on its Jansen project.

Wall issued some soothing words, to the effect that the postponements did not mean the projects were cancelled; he expects both to go ahead eventually. And he noted that BHP suggested the delay might result in substantially increasing the initial phase of production, from two million to four million tonnes per year.

Then, Wall said a curious thing: he noted that Saskatchewan’s potash royalty regime, which had a major overhaul in 2005, might be in need of a tune-up. The previous NDP government had revamped the royalty regime to encourage potash companies _ which hadn’t built a new mine in 40 years _ to expand. The changes allowed potash companies to offset 120% of their capital expenditures against their royalty payments, which are the highest in the world.

While the changes have been spectacularly successful in causing the existing industry to expand its production capacity, critics say the royalty regime has tipped the balance too far in favour of expansion at the expense of royalty revenue on production. Now, the premier, who roundly criticized former NDP leader Dwain Lingenfelter for campaigning for higher royalty rates during the 2011 election, seems to have joined the critics.

But Wall’s words seem to have been more of a warning to BHP than a threat to the industry. Two years ago, Wall fought a very public battle against BHP when BHP launched a hostile takeover bid for Potash Corp. of Saskatchewan, the world’s largest potash producer, which is headquartered in Saskatoon. BHP had threatened to take Potash Corp. out of Canpotex, the offshore potash marketing agency, which has brought stability to the industry by matching supply with demand.

Could it be that Wall was warning BHP not to flood the market with potash, or risk paying higher royalties on its production? Given that Wall and his Saskatchewan Party colleagues unanimously supported the changes to the potash royalty regime seven years ago, no other conclusion seems reasonable.

© 2012 Investment Executive. All rights reserved.