BHP warns on short term commodities pain

Increased supply driving down commodities prices

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published September 25, 2013 11:18 am AEST

In its annual report to shareholders today, BHP Billiton (ASX: BHP) has warned that commodity prices are likely to continue falling in the short term, thanks to increases in supply.

"Increased supply has, however, exerted downward pressure on many commodity markets more recently and we expect this trend to continue over the short term. While lower rates of investment across the industry will ultimately lead to more balanced markets, all resources companies will need to improve productivity and be flexible enough to adapt to change in this more challenging environment," says chairman Jac Nasser.

Australia's three major miners, BHP, Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) have all ramped up their production of iron ore, as has Brazil's Vale. Even junior miners such as BC Iron (ASX: BCI) are expecting greater output in the years ahead. Over the long term though, BHP expects strong demand for commodities as Asia becomes more developed.

"Over the long term, we maintain a positive outlook on commodity demand as the fundamentals of demographics and economic development assert themselves across Asia. Economic rebalancing in China will bring opportunities to a more diverse range of commodities, and development in South Asia will provide a degree of support to long-term demand for steelmaking raw materials. Overall, the long-term outlook for commodity markets is fundamentally linked to the scarcity of low-cost, expandable and high-quality development opportunities. When combined with attractive demand fundamentals for industrial metals, potash and energy, conditions are supportive of BHP Billiton's low-cost, upstream and diversified strategy."

BHP announced a further US$2.6 billion investment in the Jansen potash project during 2013, as it expects potash, a fertiliser that improves the yield and quality of agricultural production, to be in high demand over the long term.

Foolish takeaway

BHP's diverse array of exposure to various commodities including iron ore, aluminium, manganese, nickel and copper, uranium, oil and gas, potash, coal means the company is well placed to see out any short term falls in commodity prices. If you want exposure to resources, BHP is pretty much the one-stop shop.

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Motley Fool writer/analyst Mike King owns shares in BHP.

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