Even BHP Billiton Limited thinks the outlook for coal prices is uncertain

BHP Billiton Limited (ASX:BHP) has been forced to cut costs due to plunging commodity prices.

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Like most others in the industry, mining giant BHP Billiton Limited (ASX: BHP) has been hit hard by plunging commodity prices in recent years. This is reflected in its bottom line results as well as its share price.

Although the shares have rebounded strongly since bottoming out at $14.06 in January, they remain nearly 33% below their price from 12 months ago and almost 60% below the high levels they achieved in 2011.

However, BHP Billiton's size and scale does give it an advantage over most of its competitors. Mining is an extremely capital intensive industry to operate in, so by producing more of its major resources, it is able to spread the fixed costs over a greater base.

In what has been a low price environment for the miners, BHP Billiton has paid particular attention to reducing operating costs wherever possible, prolonging its ability to continue operating at a profit (excluding impairments). While BHP's iron ore and oil operations have received the most attention due to their importance to BHP's bottom line, the miner has today updated the market on its coal operations.

Coal prices have crashed in recent years as a result of a slowdown in demand (particularly from China and India), coupled with a rise in supply. This has impacted BHP Billiton's share price, together with the share prices of Whitehaven Coal Ltd (ASX: WHC) and New Hope Corporation Limited (ASX: NHC) which have crashed over the last five years or so.

Wesfarmers Ltd (ASX: WES) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) have also been impacted due to their exposure to the resource.

In today's update, however, BHP noted that its coal business has delivered over US$3 billion in productivity gains since 2012, and is targeting another US$600 million by the end of financial year 2017 (FY17).

It said: "Rather than waiting for higher prices, we have been deliberate in shaping a quality, focused portfolio that allows us to deliver value in challenging market conditions and positions us well for an expected long-term improvement in coal market fundamentals."

It also said: "Against the backdrop of greater uncertainty in the outlook for thermal coal, we are confident that base demand in emerging economies will remain resilient for decades to come and our higher quality coals position us well in an increasingly carbon constrained world."

Indeed, coal is one of BHP's major commodities, with BHP Billiton demerging many of its non-core assets into South32 Ltd (ASX: S32) in 2015. However, further divestments are possible with BHP confirming that further asset portfolio optimisation will be pursued.

BHP's shares have gained 0.5% this morning after lifting by 4.4% on Monday. While some investors will likely be tempted to buy BHP Billiton shares around their current price, investors do need to be aware of the risks facing the miner.

To begin with, China's growth is slowing down which will impact demand, while supply still remains strong as well. Commodity prices are no certainty to rise from here and further declines could certainly impact BHP's bottom line.

Although they may seem like good value to some investors below $19, investors should weigh up the potential gains to be made from owning the shares compared to the potential losses if things go pear-shaped. Personally, I think there are greater buying opportunities out there elsewhere.

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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