There’s no denying the problems facing the industry. To begin with, demand growth from emerging economies such as China for key commodities is diminishing while, at the same time, production levels from the world’s largest producers are being heavily ramped up, applying a downwards pressure on the prices of the commodities. The strengthening Australian dollar is another problem facing the miners which generate their revenue from exporting products overseas.
While BHP Billiton will certainly be affected by the factors mentioned above, its higher level of diversification makes it a much safer bet than its major competitors.
Companies like Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Mount Gibson Iron Limited (ASX: MGX) focus heavily on iron ore production. While this is incredibly advantageous when the commodity is soaring, their weaknesses are certainly exposed when it drops in value. For instance, Fortescue’s shares collapsed in early March when iron ore plunged by 10% over the space of just two days. The company ended up dropping 9.4% in a single day of trading while Rio Tinto and other pure iron ore players also felt the pain. BHP fell, but nowhere near as heavily.
Although iron ore is also BHP’s major generator of revenue, the company’s risk is better spread given that it is also heavily focused on copper, coal and petroleum under its “four pillar” strategy (while potash is shaping up to become its fifth pillar). Its diversification makes the company far less susceptible to weakness in any one of these divisions, making it a much safer bet.
The miner will release its operational review for the March quarter tomorrow which will give us a better indication of how the company is travelling.
Given the high level of volatility currently blanketing the sector, an investment in any of the miners would be considered risky. However, if you believe you absolutely must have exposure to the sector, BHP is the safest option.