Published on Oct 17, 2022
Coordination Out Loud: Analysis of Public Statements from Fertilizer Industry Executives
Special Note: Coordination Out Loud is a series of articles that analyze select corporate transcripts through the lens of Joseph Harrington’s landmark paper, “Collusion in Plain Sight: Firms’ Use of Public Announcements to Restrain Competition.”
The paper concludes that antitrust enforcers can be more aggressive in bringing cases focused on evidence of public invitations to collude by conducting a rigorous analysis of public statements by executives and categorizing those statements into three different categories:
Category 1. Firms announcing that their competitive behavior is contingent on future conduct of a rival.
Category 2. Firms forecasting industry or rival conduct.
Category 3. Firms recommending that the industry behave a certain way or otherwise commending or criticizing prior industry or competitor conduct.
The Capitol Forum is interested in any and all feedback related to the statements selected in our analysis.
Nutrien Executive Comments at Morgan Stanley Global Chemicals, Agriculture, and Packaging Conference (Nov. 10, 2021)
Vincent Stephen Andrews, Morgan Stanley, Research Division: “Okay. And what about just sort of broader, I mean, we have very attractive potash prices, prices that are above the levels at which the industry has always talked about, reinvestment economics or incentive pricing for greenfield. So obviously, very good times right now, very snug environment. But how do you sort of assess, how much more capacity this might incent, obviously, it would take a long time to come online. But how do you think about not running 4 million tonnes, but having prices that might encourage other folks to add tonnes?”
Mark Thompson, Nutrien Ltd. EVP, Chief Strategy & Sustainability Officer: “Yes. Right now, Vincent, we don’t see a lot of major greenfields that have not already been approved or announced on the horizon. I think what history in this industry has proven is that those projects take longer, they’re more expensive than anybody thinks they’re going to be. And one of Nutrien’s predecessor companies, I think you could argue is one of the most effective at delivering those projects very close to budget and in a very disciplined way. So we’ve got a lot of experience in that industry. But I think history has proven also that when those projects are announced in mass waves, the industry can overbuild itself, and we don’t see that this time. I think those lessons from the past have been heeded. (Emphasis added). And so we don’t see a big wave of greenfields on the horizon aside from what’s already been announced. Of course, in this type of price environment, the marginal brownfield project for certain global producers might become more attractive. But when we look out at the horizon, certainly over the 2020s, we see the need for several million tonnes more of production over the next couple of years. And when we look at the 4 million tonnes of latent capacity in our network that you just mentioned, certainly, we’re by far best positioned from an investment economics and availability standpoint to meet that need.”
Nutrien Executive Comments at Market Outlook Session (June 8, 2022)
Jason Newton, Nutrien Ltd. Head Economist: “We’ve been bullish on the medium- to long-term supply demand prospects for nitrogen for some time given the dramatic slowdown in new capacity that was scheduled to come on stream after 2022. Given both the gas price-related reduction in European operating rates and the reduced supply from Russia, realization of this tightness in the market was brought forward to the second half of last year, particularly when combined with Chinese urea export restrictions. Given the potential for continued supply constraints for Europe and Russia, we now expect a much tighter supply-demand balance over the next 2 years, creating supply constraints and already given supply-demand trend demand growth, we expect constraints beyond 2023 as capacity additions slow. There are a number of factors leading to slower capacity additions. First, you would expect in a pricing environment like has existed over the past 12 months, there would be an increase in the number of projects being announced, but that has not been the case. (Emphasis added). One reason may be uncertainty with respect to long-term regulation and market conditions as industry players focus on meeting emissions targets… Throughout this presentation, I outlined a number of factors that we believe are supportive of prices above mid-cycle levels for an extended period of time, which could be throughout the next 3 to 5 years, depending on which scenarios unfold. We also believe that mid-cycle prices will be higher than we have historically assumed. (Emphasis added). We have historically approximated mid-cycle fertilizer prices as the 10-year average.”
Capitol Forum Analysis
In the first quote, Nutrien executive Thompson both criticizes past industry behavior and makes a recommendation for how the industry should behave going forward: “But I think history has proven also that when those projects are announced in mass waves, the industry can overbuild itself, and we don’t see that this time. I think those lessons from the past have been heeded.” (Emphasis added).
Such a comment seems to fall squarely in Category 3 from Harrington’s paper. Nutrien and other fertilizer manufacturers have announced increases in production since the fallout from Russia’s invasion of Ukraine further destabilized the fertilizer market and widened the global supply gap. But the economist’s comments exemplify the companies’ confidence that high prices and severe supply constraints will persist over the long term.
Joseph Harrington, Patrick T. Harker Professor of Business Economics and Public Policy at The Wharton School, University of Pennsylvania
The executives use “a general tone of meeting supply with existing capacity” and “being cautious about investment even though prices are high” he said. But, he added, they also recognize the need to bring new capacity online. “I probably don’t see them as announcements intended to coordinate for they seem too vague and nuanced to be effective,” said Harrington. “Nevertheless,” he continued, “I would recommend keeping an eye on the market for this undercurrent of restraint may become more explicit.”
John Kirkwood, Professor of Law at the Seattle University School of Law
Regarding the executive and economist at Nutrien: “That did sound like a normal recognition of their mutual interest in limiting capacity, even though prices were high. So the nutrient comments would tend to reinforce oligopolistic coordination in the industry. [They] saw that supply was short, and prices were up but didn’t think there would be new capacity built, because in the past, when new capacity was built, it tended to be overbuilt, and there’s too much capacity depressing prices. So yes, that one suggested the typical kind of signal that we’re all going to play the game together here and not expand capacity.”
Thomas Horton, Professor of Law at the University of South Dakota School of Law
The Nutrien executive’s comments fit into Harrington’s third category. On the economist’s comments: “I think this is the dominant firm statement of ‘Yes, the industry’s very good for us. We’re making superb profits above competitive level profits, and we expect to continue doing so.’” The economist, Horton noted, also cited the regulatory hurdles to adding capacity, which shows Nutrien isn’t worried about the threat of competition. “They have positioned themselves as the dominant firm with the most latent capacity in the network and the by far the best positioning from an investment economics and availability standpoint to immediately move in and grab any additional tonnage that might be sought.”
Official Comment from Nutrien
From Megan Fielding, Vice President of Communications: “We get asked by our investors and shareholders on a regular and ongoing basis to comment on global market dynamics and our perspectives on Nutrien’s own capital allocation and investment opportunities. These comments are in this context and are referencing our own unilateral and historical long-term capacity expansion decisions and views on global market fundamentals. The discussion centered on what Nutrien is doing in response to global supply and demand, which we evaluate internally on a regular basis. Our focus is always Nutrien’s operations and our capability to bring on new capacity in response to the global market dynamics, as we demonstrated in 2021 and 2022.”