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Why the BHP Billiton Limited share price could have further to fall

The BHP Billiton Limited (ASX: BHP) share price was slammed on Thursday, shedding 5%, while it has lost another 1% early in this morning’s session. Although the BHP share price is still sitting well above its low levels from early last year, investors may be starting to get a little anxious holding onto their shares.

The BHP share price dropped to around $14 early in 2016 as commodity prices tumbled. By the end of the year, however, BHP had become one of the market’s top performing blue-chip shares as resource prices rebounded with enthusiasm growing throughout the mining investment community. The Fortescue Metals Group Limited (ASX: FMG) share price benefited as well, along with Rio Tinto Limited (ASX: RIO).

Recently, the iron ore price looked as though it could push past US$100 a tonne – a remarkable achievement after falling beneath US$40 in December 2015. Instead of continuing its upwards trajectory, however, it has since stumbled. One tonne of iron ore is now fetching US$86.79, according to The Metal Bulletin. Oil prices have also been stung, removing some of the shine from owning BHP’s shares.

Commodity prices could do anything from here. The dip in the iron ore price could prove to be a temporary issue for the miners, or the problem could continue to grow. Indeed, as reported by The Australian Financial Review recently:

“However, for all that commodity’s price gains defied predictions in 2016 and early 2017, many analysts now believe new supply, high inventories, and insufficient demand are setting iron ore up for sharp losses in the second half of this year.”

It continued…

“Gavekal analysts Rosealea Yao and Arthur Kroeber wrote in a briefing note that iron ore could fall by 30 per cent or more. Meanwhile, a team of analysts at HSBC, led by Anshul Gadia, went so far as to argue that iron ore may fall below the cost of production in the second quarter of 2017 in order to clear the massive stockpiles of iron ore in Chinese ports, which hit 120 million tonnes at the end of February.”

As far as costs of production goes, BHP has one of the most enviable in the world right now. Compared to many other miners, it would fare much better if iron ore prices were to fall. However, that isn’t to say its share price would not be impacted: BHP’s share price could fall significantly from its current level with sharp one-day falls certainly not impossible. Investors discovered that the hard way just yesterday.

The BHP share price has rallied hard since early 2016. Although it has since retreated more than 15% since hitting its high of $27.95 (it’s now fetching around $23.70), it still seems like a risky investment proposition considering the possibility of such sharp falls in the iron ore price. I’m certainly not buying at the current price.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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