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BHP should avoid tough potash conditions

Following the decision of OAO Uralkali to leave the potash marketing group Belarusian Potash Co. in July, share prices of key miners have plummeted amongst signs that potash prices could fall by as much as 20%.

Whilst Agrium Inc. is down just 2% since the announcement, the other two companies including Potash Corp. of Saskatchewan and Mosaic Co, which together make up North American potash marketing group Canpotex, are down around 14% each.

The sharp falls come as investors fear that lower potash prices will have a heavy impact on profits. Although production from some mines will be expanded this year in order to fulfill contracts from overseas buyers (for instance, Saskatchewan has been boosting production by 13%), the lower prices and increased levels of competition will likely see growth slow to around 6.5% and overall output to slow to 4.5% for the next year.

The news comes after Australian miner BHP Billiton (ASX: BHP) committed itself to spending a further $2.6 billion on its Jansen project over the coming years, with the miner recognising that demand for the fertilizer ingredient will soar as the global population continues to increase.

Although BHP’s decision certainly carries its risks, the miner’s CEO, Andrew Mackenzie, saw the project as a worthy investment which focused on the long-term success of the business.

Investors and analysts were skeptical at first of the company’s commitment to the project, but many have since come around, having recognised that the time frame stated by BHP would allow for the company to continue cutting operating costs whilst some of the oversupply in the potash market will be able to work through the system before production begins.

Foolish takeaway

Compared to Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG), BHP maintains much more diversified operations, making it a safer bet in a time of heavy volatility for the sector. However, at today’s price, it would be wise to add to your watchlist and wait for a more attractive entry point.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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