This year was meant to be BHP Billiton Limited's (ASX: BHP) return to form.
Many analysts had 2014 pegged as a big year for the Big Australian, and had predicted that it would knock the big four banks off their perch as the ASX's best performing blue-chip stocks.
However, that theory proved to be way off the mark with the stock having dropped 18.6% since the beginning of the year, compared to a 0.7% decline from the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).
It then got a whole lot worse for the miner last week after oil prices plunged further. BHP's shares fell to a fresh 18-month low at $30.67 after the Organisation of Petroleum Exporting Countries (OPEC) – a cartel like group which controls roughly 33% of the world's oil supply – decided not to curtail production in a massively oversupplied market. To highlight the effect of this decision, Brent oil dropped 8.2% to just US$72.55 a barrel.
While just under one quarter of BHP's earnings come from petroleum products, this decision could have a huge impact on BHP's profitability. Other companies like Santos Ltd (ASX: STO), Senex Energy Ltd (ASX: SXY) and Woodside Petroleum Limited (ASX: WPL) also fell heavily following the news.
However, the falling oil prices are not BHP's only concern. In fact, far from it.
Triple Whammy…
The falling iron ore price is of a far greater concern for BHP, not to mention the coal price, too.
Iron ore, a key steelmaking ingredient, is trading at roughly US$70 a tonne today, which is 48% below its price at the beginning of the year. While BHP is well equipped to cope with these lower prices, its margins will still be heavily impacted with iron ore currently generating just under one third of BHP's annual revenues.
To make things even worse, BHP Billiton is striving for annual production of 290 million tonnes by 2017 under the belief that Chinese demand will peak around the year 2025. However, fresh forecasts are now suggesting Chinese consumption will peak in 2017 at 740 million tonnes, which could seriously stunt BHP's long-term growth prospects.
Coal, another one of BHP's 'four pillars', is also under enormous pressure. The resource's price has fallen dramatically in recent years and there are concerns about its future demand due to its effect on the environment. With China becoming increasingly strict on its environmental standards, the very future of the use of the commodity has come under question which could further burden BHP's returns.
Should you buy?
Now trading at just $30.92 per share, there is definitely reason to be interested in the Big Australian, but buying today could prove to be a costly mistake. With iron ore and oil prices both tipped to fall further in 2015, BHP's margins could continue to get thinner which could see the shares fall even further than their current price. While BHP has earned a spot on my watchlist, I won't be buying until the level of volatility subsides, or until I am presented with a much more attractive share price that I believe reduces my level of assumed risk.
Until then, there are plenty of other great investment opportunities to capitalise on.
