0.3 Reasons That May Make BHP Billiton plc A Sell

Today I am detailing why I believe BHP Billiton (LSE: BLT) (NYSE: BBL.US) are set to come under fresh pressure as the global economic recovery remains patchy.

Dragging global demand ready to hit earnings

Shares in mining giant BHP Billiton have surged in recent weeks, leaping more than 10% in little over a fortnight after strong import data from China raised hopes of escalating commodity demand. However, I believe that a 0.3% drop in demand for the country’s goods reveals the true state of the world economy, creating a worrying outlook for raw materials giants such as BHP Billiton.

Latest Chinese import figures for September created a mostly-optimistic picture over commodity demand. In particular, iron ore purchases leapt to a record about 74.6m tonnes last month, up 15% from the same month last year. And imports of bellwether metal copper advanced to 18-month peaks at 457,847 tonnes.

Still, Chinese import data is notoriously choppy, while scepticism abounds over whether purchasing levels actually match demand in the real economy. Indeed, buying activity from Asia’s biggest economy similarly sparked into life during the aftermath of the 2008/2009 banking crisis, despite orders for Chinese goods dropping through the floor. In this case, Beijing was simply cashing in on collapsing commodity prices through restocking rather than responding to demand for its goods.

And export data for last month pays heed to this theory. This showed overseas shipments drop 0.3% from the same month in 2012, falling well short of broker estimates which were closer to 6%. And as Reuters points out, shipments to other key emerging markets of South-East Asia dropped to their lowest in 17 months in September.

With the International Monetary Fund slashing its global growth forecasts this month, to 2.9% and 3.6% for 2013 and 2014 respectively, the road to meaningful growth in the world economy looks to remain insipid at best. Combined with already-worrying supply/demand balances across multiple commodity classes, this is likely to translate into fresh cross-commodity price weakness, in my opinion.

For example, oil prices have come under renewed pressure in recent days amid a slew of uninspiring data from the US and Europe, with Brent prices collapsing to multi-month troughs below $107 per barrel as of last week.

This area alone is responsible for almost a fifth of BHP Billiton’s revenues, but with other critical markets expected to suffer declining prices over the medium-to-long term — a rising surplus in the crucial iron ore sector, key to 30% of the firm’s turnover, is widely anticipated to weigh on prices — I believe that the mining giant should experience ongoing earnings difficulties.

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> Royston does not own shares in BHP Billiton.