Why I Hate BHP Billiton plc

I may hold mining group BHP Billiton (LSE: BLT) (NYSE: BBL.US) in my portfolio, but that doesn’t mean I like everything about it. Here are five things I hate about the company.

It is down 20% over the last three years

That compares unfavourably to a 13% rise in the FTSE 100. BHP Billiton, like most of the miners, has been a major underperformer in recent years. The declining appetite of top metals consumer China largely to blame. Everybody is waiting for it to recover, but I’m not convinced. China faces plenty of headwinds, including rampant over-investment, rising wages, a shrinking workforce and looming demographic crunch. Even if it survives all that, it needs to make the switch from industrialisation to consumption, hitting its once-voracious demand for metals and minerals.

I don’t know what happens when QE ends

Quantitative easing has diverted billions of hot dollars into commodity stocks, inflating prices and distorting markets. Yet prices have still fallen, despite $85 million monthly QE3. But at some point, the Fed must start tapering. Nominee Fed chairman Janet Yellen sounded dovish about QE tapering at the Senate on Thursday, but even she admitted the printing presses can’t roll indefinitely. What happens when they slow, then stop?

Falling demand is hitting rising supply

BHP Billiton recently posted its 13th consecutive annual iron ore production record, and a 28% increase in copper production to 1.1 million tonnes. Last month’s operational review showed its Western Australian Iron Ore business producing a record 54 million tons for the three months to 30 September. A large chunk of that is earmarked for China. BHP Billiton isn’t the only miner to be breaking production records. Rising supply at a time of uncertain demand could ultimately depress prices further.

The recent rally could come unstuck

JP Morgan Cazenove’s equity strategy team has just recommended shorting big mining stocks, which it claims are nearing the end of a bear market rally. It said past bear market rallies in the sector tend to last just four or five months, and deliver 30% to 35% upside. That’s exactly where we are now. They also correlate with emerging market and Chinese stocks, both of which have rebounded lately, then fallen back. I’m already feeling bearish. That kind of talk makes me even more nervous.

I can’t just walk away

Despite my concerns, there is a lot of positive noise about BHP Billiton. And some positive numbers, notably earnings per share growth, currently forecast to hit 17% in the year to 30 June (although wild swings in commodity prices could quickly undermine that). It trades at a modest 13.9 times earnings and yielding a tasty 3.9%. I’m also impressed by management’s cost-cutting campaign. So there is still a lot to love about this stock. And hate.

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> Harvey Jones owns shares in BHP Billiton.