Investors of BHP Billiton(LSE: BLT), Royal Dutch Shell(LSE: RDSA)(LSE: RDSB) and Rolls-Royce(LSE: RR) have been feeling drained. In an equally weighted portfolio consisting of only these three stocks, performance would be down more than 30% over the past 18 months as the FTSE 100 remained generally flat.
At first glance, it might seem preposterous to draw parallels between an oil and gas firm, a diversified natural resources producer and apower systems manufacturer. But all three of these companies are being hampered by similar macroeconomic conditions specifically, unfavourable commodity prices.
BHP Billiton
BHP Billiton has shed 35% of its value since August, as illustrated below:
With its enormous exposure to the iron ore market, its no surprise that much of the companys fate is tied to the commoditys price.
Chinas rapid industrialisation in the last decade fuelled an unprecedented demand for BHP Billitons products. As Chinese villagers migrated to cities, the country needed huge amounts of steel to build critical infrastructure such as office buildings and apartments; the need for steel meant a need for iron ore, and this seemingly once-in-a-lifetime spike in demand lured new producers into the market and incentivised existing players to expand capacity far beyond the commoditys long-term average.
Today, Chinas economy is slowing. Demand for iron ore is waning. Prices are at a six-year low, and BHP Billiton has been feeling the pain. With high fixed costs and revenues exposed to the wild fluctuations in commodity prices, the companys margins are vulnerable, and chief executive Andrew Mackenzie doesnt expect much to change in the near term:
At todays lower rates of demand growth, incremental supply will take longer to absorb. In this environment we are well prepared for the possibility of an extended period of lower prices in several commodities.
The current situation may seem dire, but the company is well positioned to ride this out. Low commodity prices are squeezing all producers; if the rates arent high enough to sustain operations, it will be the higher-cost producers that cease production first. With its scale, expertise and favourable position on the cost curve, BHP Billiton should be able to ride out this storm.
Rolls-Royce and Royal Dutch Shell
Royal Dutch Shell and Rolls-Royce have likewise suffered the pain inflicted by falling commodity prices. Royal Dutch Shells first-quarter 2015 profits nosedived in the wake of collapsing oil and gas prices. S&P cited the slide in commodity prices as a primary reason for downgrading the company this week, and the stock has dropped 25% since last September, as below:
Rolls-Royces exposure to commodity prices has been more indirect. The companys performance is linked to the health and condition of its customers, and those firms have not been faring well. The precipitous drop in oil prices has meant reduced capital investment of Rolls-Royces oil majors. The companys mining customers have reduced their consumption as core commodity prices have plunged. Over the course of 18 months, Rolls-Royce has issued multiple profit warnings, replaced its CEO, scrapped its share buyback programme and lost 40% of its value.
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R.D. Greengold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.