If you own shares in a resources stock, good luck, you might need it.
In the past year, we've seen iron ore fall more than 30%, oil has dropped 55%, Australian thermal coal has lost 20% in the past three months, and now copper is being slammed.
The metal has fallen 8.3% according to analysts, to around US$5,489 a tonne and hitting 6-year lows. Commodities have now hit a 12-year low, with the Bloomberg Commodity Index falling to levels not seen since 2002.
China consumes around half the world's output of copper, and economic data released this week show China's trade with the rest of the world grew at just 3.4% in 2014, compared to a 7.5% government target. It's taking the toll on Australia's copper producers today, with Tiger Resources Limited (ASX: TGS) losing 14.3% to 12 cents, PanAust Limited (ASX: PNA) down 8% to $1.33, Oz Minerals Limited (ASX: OZL) down 6.7% to $3.43 and Sandfire Resources NL (ASX: SFR) 6.5% to $4.17.
As the chart below shows, Australia's largest exports have been getting smashed since February 2013, and there's no real sign of it ending.
Source: IndexMundi, Bloomberg
Even the diversification in miners like BHP Billiton Limited (ASX: BHP) offer limited protection. Petroleum, copper, iron ore and coal made up 88% of revenues and virtually 100% of the big miner's earnings before interest and tax (EBIT) last financial year.
The big lesson is, the huge risk posed by companies that can't control the price they sell their products at. In other words, any company that sells commodity products, whether it be metal, mineral, oil, gas, airline seats or other commoditised-product.
Unless investors can buy shares with a big margin of safety, the risks may not be worth it.
