It hasn’t been the ideal start to 2014 for iron ore mining giant BHP Billiton Limited (ASX: BHP). While analysts had it pegged to be one of the best stocks to buy, its shares have so far dropped back 2.2% since the beginning of January.
And things don’t look like getting any better any time soon. The stock was amongst the market’s heaviest fallers in yesterday’s session, falling 49c or 1.3% in heavy trading which dragged the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) down 45.6 points. Here are three reasons why the shares might have hit a rough patch:
1. Iron ore
Although it is more heavily diversified than the other mining giants, iron ore still remains BHP Billiton’s primary generator of revenue (and it’s ramping up annual production rates). The steelmaking ingredient has dropped considerably in price recently and is now trading at just US$106 a tonne. Analysts are now suggesting it could fall as low as US$80 a tonne sooner rather than later and although BHP maintains a low breakeven price, a fall that heavy would still impact on their overall margins!
Coal is another commodity that BHP is heavily exposed to, and it’s been on a steep decline since January 2011! To make matters worse, the company’s own energy boss has stated that, “it is hard to see any relief in the short term”, implying prices will continue to drop. Despite this, the company will sacrifice short-term earnings based on a strong long-term outlook which is sure to deter some investors.
3. China slow-down
BHP wasn’t the only iron ore miner on the nose with Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) also in the market’s firing line as growth in the Chinese services sector continues to slow. The HSBC China Services Activity Index came in at 51.4 points in April. This was down from 51.9 points in March, which although still expanding, will play on investors’ minds.
I’ve long said that BHP is the safest bet for anyone wanting exposure to the mining sector, due to its high level of diversification and lower cost base. However, conditions will likely remain volatile for some time yet, so you might be better off waiting on the sidelines for a more appealing price.
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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.
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