Today I am looking at why I believe BHP Billiton (LSE: BLT) (NYSE: BBL.US) is likely to remain a risky pick for investors for some time to come.
Macro concerns crumple commodity prices
The effect of enduring economic worries across the globe, and consequent impact on commodity prices, continues to weigh on mining firms such as BHP Billiton. Indeed, the firm saw turnover slump 8.7% in the year ending June 2013, to $65.97bn.
Plummeting revenues prompted underlying earnings before interest and tax to slide 22.4% lower to $21.13bn. Aside from in aluminium, manganese and nickel, BHP Billiton saw earnings collapse across its other main markets, including a 73.3% decline in earnings from its coal division. With much work still to be accomplished to fix the global economy, I believe that a backdrop of price weakness remains very much on the cards.
Market balances continue to deteriorate
Meanwhile, the effect of severe misbalance in many of BHP Billiton’s key markets is exacerbating the effect of volatile market sentiment on commodity prices, as rafts of new capacity contribute to already bursting supply and global demand remains largely weak.
In the iron ore market, for example, a critical earnings driver for BHP Billiton, Goldman Sachs expects an 82m tonne surplus in 2014, Bloomberg reported last month. This is expected to grow each year through to 2017.
The China question
The jury is out on whether the economy of China — the world’s commodity powerplay — is set to hit another uptrend after a marked slowdown, the effect of slumping demand from Europe and the US severely affecting export volumes in recent times.
Latest GDP data showed Chinese growth slow to 7.5% in April-June from 7.7% in the first three months of 2013. And further cooling could cast fresh doubt on commodity demand moving forwards.
Fresh trade data this week showed iron ore imports into Asia’s largest economy fall to just over 69m tonnes in August, down 6% from the previous month. The figure still remains historically high, however, and July’s 73.14m tonnes was the highest on record.
But with steel mills now fully stocked after taking advantage of severely depressed iron ore prices in recent months, the effect reduced off-take for an already-bloated iron ore market threatens to push metal prices lower again.
Shipments of bellwether metal copper into China also dropped 6% on-month in August, to 387,564 tonnes. Oscillating import patterns continue to cast doubt over whether the country is responding to actual demand, or whether Beijing is taking advantage of low commodity prices to restock, as seen following frantic buying activity after the 2008/2009 global recession.
Such uncertainty, worsened by patchy economic data from Europe and Japan — and to a lesser extent the US — could cause fresh waves of volatility for macro-sensitive stocks such as BHP Billiton.
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> Royston does not own shares in BHP Billiton.
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