is becoming a more focused and better-run company. That's going
to pay dividends over the long haul, but in the near term,
economic growth and commodity prices are going to be a much
bigger determinant of financial performance.
Emerging markets like China and India are expected to drive
the world's growth. And this will likely remain true for years to
come. For example, the World Bank expects China's gross domestic
) to grow around 7.6% this year. India is projected to grow GDP
by 5.5%. Compare that to the United States and Europe, which the
World Bank expects to grow at 2.1% and 1.1%, respectively.
However, that's not quite as exciting as the past. For
example, in 2007, China's GPD expanded at an amazing 14%, capping
a string of double-digit years. Since that time, it's headed
slowly lower. So, 7.6% looks great in relation to other
countries, but it's anemic relative to China's own history. And
while India is going the other way in terms of growth, with
future GDP growth expected to be higher than it is today, the
uptick isn't as large as the drop China has seen.
In other words, there's definitely growth ahead, but it won't
be as robust as it has been historically, because the biggest
countries in the world, China (19% of the world's population) and
India (17%), aren't going to offer up headline-grabbing growth
numbers. Asia is a key customer for miners like BHP, so that's a
notable headwind that will apply downward pressure on the
Supply and demand
In other words, there's demand for the key materials BHP
produces, but what level of demand there will be is still in
flux. However, it takes years to open up a new mine. So, projects
that were started while demand was robust are only now coming on.
Thus, supply has swamped demand.
For example, between 2002 and 2012, Indonesia increased its
coal production from roughly 100 million tons a year to around
450 million tons. The country's consumption, meanwhile, started
that span at under 50 million tons. By 2012, Indonesian
consumption was still well below 100 million tons annually. The
difference between production and consumption is exported.
Although Indonesian coal is something of an extreme example,
it clearly demonstrates the supply problem facing miners. And BHP
has to deal with this general trend across all of its major
product categories except oil. Until there's some resolution to
the supply issue, BHP will face markets with solid, if not
spectacular, demand and still low prices.
Dealing with these two big issues has left BHP in retrenchment
mode. That's included shedding nearly $7 billion worth of
investments over the last two years alone. While that's done a
great deal to hone the company's focus on iron ore, copper, coal,
and oil, BHP still owns a host of other assets. For example, it
is building a potash mine and has nickel, aluminum, and manganese
The company's full-year business update specifically
highlights that BHP continues "to actively study the next phase
of simplification, including structural options." In the
meantime, it has to run what it still owns, and run it well.
Source: Oregon Department of Transportation, via Wikimedia
That is a recipe for distraction. The company has proven it
can get better while going through big changes, hitting record
production levels at 12 operations and producing more iron ore
and coal in fiscal 2014 (year-end June) than ever before. But
that's the past, and the future could be very different. And if
operational results falter because of BHP's still-changing
profile, investors will likely react poorly.
Still notable risks
BHP Billiton has the underpinnings of a great long-term
investment. But that doesn't mean the company is out of the woods
just yet. Demand for raw materials is still in flux, supply
remains elevated, and there is a notable risk of a mistake as BHP
adjusts to deal with a changing industry landscape. Any of these
issues could derail the company's stock.
Do you know this energy tax "loophole"?
You already know record oil and natural gas production is
changing the lives of millions of Americans. But what you
probably haven't heard is that the IRS is encouraging investors
to support our growing energy renaissance, offering you a tax
loophole to invest in some of America's greatest energy
companies. Take advantage of this profitable opportunity by
grabbing your brand-new special report, "
The IRS Is Daring You to Make This Investment
," and you'll learn about the simple strategy to take
advantage of a little-known IRS rule. Don't miss out
on advice that could help you cut taxes for decades
to learn more.
3 Reasons BHP Billiton Ltd Stock Could Fall
originally appeared on Fool.com.
has no position in any stocks mentioned. The Motley Fool has no
position in any of the stocks mentioned. Try any of our Foolish
free for 30 days
. We Fools may not all hold the same opinions, but we all believe
considering a diverse range of insights
makes us better investors. The Motley Fool has a
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights
reserved. The Motley Fool has a