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Why BHP Billiton Limited’s decision to slow quest for fifth pillar was a good one

Potash could well become a “fifth pillar” for BHP Billiton Limited (ASX: BHP) in the future, but analysts have welcomed the miner’s decision to slow its investment in the fertiliser ingredient by 25% annually.

When the mining behemoth delivered its 3Q production results last week, it was announced that its annual investment in its Canadian Jansen project would be reduced from roughly $800 million to $600 million. This will be done in an attempt to time its development to meet strong market demand which is expected in the decade (or decades) beyond 2020.

There are certainly promising signs for potash. According to a United Nations report, the world’s population is expected to top 9 billion people by 2050 (compared to roughly 7.2 billion today). As the population grows and incomes in emerging economies continue to improve, people will demand higher quality nutrition to feed themselves which will see demand for the product skyrocket.

Despite its strong prospects however, there is currently a huge supply of the fertiliser ingredient that demand is just not meeting strongly enough, meaning that now is not the ideal time to be ramping up production stages. Further cuts in capital expenditure on the project could well be made next year also.

The decision to reduce capital expenditure has been welcomed by the market which is yet to be completely convinced by the Jansen project (located in Canada’s Saskatchewan), particularly considering the overall project is tipped to cost more than $17 billion. The company’s shares have risen 0.8% since Wednesday’s release of the results.

Foolish takeaway

Fellow miner Rio Tinto Limited (ASX: RIO) has expressed its confidence in the potash market after recently declaring it was sitting on a big deposit in the same basin as BHP Billiton’s Jansen. While it has said that “drilling results indicate encouraging potash grade and thickness”, it is still widely believed that BHP has the greatest exposure to the substance.

Although BHP’s quest of a fifth pillar may have slowed down, it is still an exciting prospect for long-term investors.

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

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