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BHP Billiton Limited (ADR) (BHP), Mosaic Co (MOS): Should This Miner Move Forward With Its Potash Project?

In August, mining giant BHP Billiton Limited (ADR) (NYSE:BHP) is expected to make a decision on whether to move forward with its potash project in Saskatchewan, Canada. While the company has already pumped in billions of dollars into the project, the breakup of one of the two cartels in the potash market on July 30 has raised the possibility of a drop in potash prices. Given this scenario, the big question is whether BHP Billiton Limited (ADR) (NYSE:BHP) should continue with the project.

BHP Billiton Limited (ADR) (NYSE:BHP)

BHP Billiton’s “fifth pillar”

A slowdown in China, a major consumer of raw materials, has put pressure on prices of commodities over the past year, forcing major mining companies to sell non-core assets and avoid investments in big mining projects. BHP Billiton Limited (ADR) (NYSE:BHP) has been no different. Last year, the company announced that it will delay its planned $20 billion Olympic Dam project. BHP Billiton Limited (ADR) (NYSE:BHP) had also said last year that it will not approve any major projects in the year to June 2013. But with the end of the moratorium period, investors have been speculating whether the company will move forward with its Jansen potash project in Canada.

Apart from these steps, BHP Billiton Limited (ADR) (NYSE:BHP) has been also looking to enter the potash market in order to diversify its operations. With potash, the company is looking to capitalize on rising food demand. In 2010, BHP Billiton Limited (ADR) (NYSE:BHP) announced a hostile $40 billion bid for Potash Corp./Saskatchewan (USA) (NYSE:POT). BHP, however, eventually backed out after Canada’s national and provincial governments blocked the takeover attempts, citing national interests.

But BHP did not shelve its plans to enter the potash market. The company had a strong reason to pursue the potash business. Rising income levels in countries such as China and India boosted global food demand by the mid-2000s. This in turn led to an increased demand for fertilizers as farmers looked to improve crop yields. As a result, prices for potash, an essential commodity in the production of agricultural fertilizer, surged to $825 a ton by 2009. Although prices have since then fallen by more than half to around $400 a ton, the fundamentals for the potash market remain strong.

Potash Corp./Saskatchewan (USA) (NYSE:POT) has been described as a “fifth pillar” for BHP Billiton, with the other four being petroleum, copper, iron ore and steel-making. However, the company may have to rethink whether it is feasible to move forward with building the “fifth pillar” following a major development in the potash market on Tuesday.

Breakup of the Belarusian potash cartel

On Tuesday, Russia-based Uralkali pulled out of the Belarus Potash Company (BPC) export cartel, citing violation of an agreement from its Belarusian partner. BPC was one of the two cartels operating in the potash market, with the other one being North America’s Canpotex. The North American cartel includes Potash Corp./Saskatchewan (USA) (NYSE:POT)., Mosaic Co (NYSE:MOS), and Agrium. Between them, BPC and Canpotex control 70% of the global potash market and hence had been able to maintain potash prices at profitable levels. However, with the breakup of the Russian cartel, the virtual duopoly in the potash market has ended.

The dismantling of the world’s largest potash cartel is likely to have a significant impact on potash prices. Uralkali’s CEO Vladislav Baumgertner expects global competition become stronger in the near future, which will push prices down. The company expects global potash prices to fall below $300 per ton in the second half of this year.

Not surprisingly, shares of North American potash producers have tumbled. At last check on Tuesday, Mosaic shares were down nearly 18%, while Potash Corp./Saskatchewan (USA) (NYSE:POT) shares were down nearly 20%. The development comes just a few days after Potash Corp./Saskatchewan (USA) (NYSE:POT) had reported that its average realized potash price fell from $433 per ton in the second quarter of 2012 to $356 per ton in the second quarter of 2013. The company had cited competitive pressures, which moved contract and spot market pricing lower, as the reason for lower realized prices.

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