BHP Falls to New Lows as Their One Last Hope Crumbles

It’s not the best time to be BHP Billiton [ASX:BHP] right now. Share prices fell 5.2% yesterday to a 10 and a half year low. Investors might see more of the same today. BHP has already dropped 1.13% in early morning trade. The general decline of commodities hasn’t stopped. And the pressure of declining economic growth out of China might even plunge BHP’s share price below $15.

BHP Shares Jan 12th

Source: Google finance

Copper will be the future?

It’s not coal or even iron ore that BHP have pinned their hopes on. BHP will look to copper to propel them into the future.  China has now moved from a industrialise economy to a consumerists nation. Yet infrastructure in China is still going up left, right and centre. Not to mention China’s middle income class skyrocketing, making more newly rich Chinese.

What does all this mean? China needs more copper. Copper is predominately used for electrical equipment. Thus if China want to keep striding out of the dark developing economy category, they need more copper.

All throughout 2015 and much of 2016, commodities have been a focal point. News stories of commodity prices declining because of China’s receding growth are popping up everywhere. And last night was no different.

China sneezes and commodities catch a cold

Commodities tumbled overnight, with some reaching new lows. Oil traded down 5.28%, hitting 12 year lows. Even BHP’s beloved copper was not immune to the decline. Copper dropped 7.23% to a new six year low.

And what sparked the decline?

Sluggish growth figures out of China, yet again.

China’s PPI (Producer Price Index) for manufactured goods and CPI (consumer price index) both missed their expected figures.

Chinese PPI reflects trends in the wholesale markets, manufacturing industries and commodities market. Chinese CPI represents the change in price levels. Or more simply, CPI shows if people are spending. Both PPI and CPI missed expectations by 0.1%. The retractions of both indicate that Chinese markets aren’t improving, combined with low populace spending.

China’s economic figures are playing havoc on commodities now more than ever. The price of iron ore jumped off 11 year lows a little over two weeks ago. Yet it seems the never ending pessimism out of China brings everything back down. Iron ore has started to creep back to that US$40 mark.

Tomorrow China will release its trade balance figures. If numbers come in below the expected 339 billion, commodities might again slide lower.

Can BHP out last China’s decline

BHP has made a bold bet on copper. The company is planning to increase production while slashing production cost. Copper boss, Daniel Malchuk, has already crunched the numbers. He expects production cost to reduce $0.13 per pound in FY17 compared to FY16.

But even if China decides to decline for the next few years, BHP is steadfast on copper.  BHP is counting on attractive long-term fundamentals to support their positive outlook on copper.  One trend BHP points to is the change in copper production compared to copper earnings.

BHP Earnings Jan 12th

Source: BHP Billiton

As seen above, copper production has decreased while earnings contributed by copper have increased. Malchuk might be looking at an outlier for FY15 however. Regardless, BHP feels that copper is their winning ticket.

Time will tell if BHP has chosen correctly. It will likely be years before we find out the answer.

Härje Ronngard,

Junior Analyst, Money Morning

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