Whichever way you look at it, 2014 was a shocking year for BHP Billiton Limited (ASX: BHP).
While the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) managed to edge slightly higher, the world's largest miner ended the year down nearly 23%. 2015 hasn't started off too bright either with the stock having dropped another 1.3% early in today's session.
So why was 2014 such a bad year for BHP?
Commodity prices had already been deteriorating before 2014 got underway, but no one anticipated the rapid rate at which they would drop over the last 12 months. Iron ore, BHP's largest revenue generator, plunged roughly 47% from US$135 to US$71 a tonne while oil prices also sank to a five year low, losing almost half of its value since June.
Both commodity slumps came as a result of heavy oversupply, combined with waning demand growth. For iron ore, companies like BHP and Rio Tinto Limited (ASX: RIO) ramped up their supply while Chinese demand growth for steel dropped off considerably. For oil, OPEC and American shale producers are supplying more oil than the markets had expected while less oil is being demanded in a sluggish global economy.
With OPEC and US oilmen now locked in a price war, who knows how low the price will drop. Some analysts are saying it'll hit US$40 a barrel while others are speculating it could touch US$20.
To make matters worse, coal and copper also declined in value. As highlighted by The Australian Financial Review, Chinese consumption for coal fell by around 2.1% in 2014, resulting in a 25% drop in value, while copper prices also hit a five-year low.
While BHP's high level of diversification might protect it from volatility in any individual commodity, it doesn't help when all four of its "pillar" commodities plunge to multi-year lows.
Investors had also been hoping for greater shareholder returns – another front on which BHP failed to deliver. When the miner reported in August, it was widely expected that it would announce a share buyback program or, at very least, a special dividend. BHP Billiton decided against that initiative which, in retrospect, was probably the right decision (considering the dwindling commodity prices), but investors still have every right to be disappointed. The stock is now trading at $29.00, after beginning 2014 at $37.99.
Will 2015 be any better?
Although some analysts expect commodity prices to largely stabilise this year, others anticipate even further falls. Chinese growth is slowing and while further stimulus could generate more activity, China could still be on course for its slowest year of growth in almost a quarter of a century. That wouldn't fare well for BHP or for the mining sector as a whole.
Despite the bearish outlook, BHP still remains my miner of choice. As mentioned above, BHP maintains a higher level of diversification than any of Australia's other miners while it also boasts low operating costs, meaning it can weather these lower prices better than most. While it's worthy of a spot on your watchlist, investors ought to hold off from buying the stock just yet until commodity prices stabilise or the shares fall considerably further.
