Over the past six months, BHPs shares have fallen a staggering 30%, excluding dividends, meaning that the company has underperformed the FTSE 100 over the same period by, well, 30%.
Avoiding the sector
Unfortunately, there seems to be no relief for BHPs shareholders on the horizon.
You see, BHP has built itself around a four pillars strategy, whereby the group has concentrated its efforts on mining for key commodities iron ore, oil, coal and copper. In theory, the four pillars strategy should protect BHP from losses if the price of one commodity falls.
But this strategy fails if the prices of all the key committees fall, which they have done over the past year. The price of copper has fallen to a five-year low and the prices of coal, iron ore and oil have all fallen to levels not seen since the depths of the financial crisis.
However, unlike falls seen during the financial crisis, which were driven by unrealistically high asset prices, many of these commodity markets are now oversupplied. As a result, its possible that commodity prices wont recover for some time.
The market needs to rebalance itself. Either supply needs to be removed from the market or demand needs to increase. Until the market does return to equilibrium, theres nothing to suggest that commodity prices will return to the levels seen only a few months ago. With that in mind, it seems as if BHPs share price will remain depressed for the next few months, if not years.
Not time to sell
Still, BHP remains the worlds largest diversified, which counts for something. And the groups low production costs, coupled with a relativity clean balance sheet indicate that BHP is not likely to go out of business anytime soon.
Additionally, over the long-term, as other producers cut production due to the weak pricing environment, commodity prices could rebound, allowing BHP to ride the recovery and return to growth.
So, as a long-term, buy-and-forget investment, BHP looks to me to be a great pick at present levels. Although its not possible to say if the companys shares will return to 2,000p anytime soon.
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