BHP Billiton
BHP Billiton (ASX:BHP) is a global leader in the resources industry.
Formed from a merger between BHP and Billiton, the company is a leader in the extraction and sales of most natural resources, and is particularily strong in Iron Ore, Coking and Thermal Coal, Copper, Zinc, Oil & Gas, Diamonds and most materials key to the production of steel.
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Weakening demand weighs on BHP Billiton
As can be seen from the above chart of the FTSE 100 the market has bounced aggressively higher in recent days.
Financial shares led the way on Tuesday, with an upbeat note out from Citigroup helping the US markets to prolong the surge. Commodity stocks were not far behind, with last weeks positive news from China providing a stimulus for commodity prices to escalate.
However, Western markets have not followed China back down again this week. Poor economic data has caused the Shanghai Composite to fall around 7% from its recent high, with fresh evidence of deflation causing concerns.
The question on many investors’ minds is whether this is a turning point for markets or just a suckers rally?
This is a tough question to answer, as the UK economy is in unchartered territory. At its latest meeting, not only did the Bank of England reduce interest rates to a record low of 0.5%, but it also unveiled an initial £75 billion program of quantitative easing (Issuing new Central Bank money to purchase assets). The hope is that commercial banks will respond by stepping up lending to the private sector. However, there could be a lag before the effects of recent actions are felt.
Technical analysis of the above chart remains bearish. The FTSE could put on over 20% before returning to the 200 day moving average, which would suggest that the downtrend has broken. Also, many major technical levels have been breached in the past few weeks, with the DOW and S&P trading significantly below their 2003 lows.
In summary, I don’t believe this can be labeled as anything other than a bear market rally at this stage. Historically we could see the FTSE retrace 50% of the recent falls back up to a peak of 3900 before resuming the longer term trend lower.
Consequently, I am a seller of further strength above 3850. Following this I believe the FTSE could fall to 3370, which reflects a 50% drop from the 2007 highs and also corresponds with the support levels seen in 2003.
This week China announced that factory output and retail sales were slowing down, thus sparking fears that the global crisis is taking more of a toll on the world’s third largest economy than first thought. Mining stocks led the sell off, as investors feared that falling industrial output would lead to slower demand for raw materials.
Conversely, in the UK, the resource sector has been among the biggest risers this week, with the sector average gaining over 15% in the past 7 days. BHP Billiton is the world’s largest diversified resource group and is the focus of this week’s article.
As can be seen from the above chart of Billiton the shares have outperformed the wider market and gained over 30% in recent days. The shares are almost back to their February highs, which were experienced when the FTSE was over 500 points higher.
There is evidence of a clear downward trend since the start of 2009, with a series of lower highs and lower lows suggesting the next move could be lower. The recent rally has sent the oscillators into overbought territory, with the relative strength index (RSI) and stochastic trading close to six month highs.
Furthermore, there are increased concerns that the economy may take significantly longer to recover and for growth to return to previous levels than was initially expected. As a result, several analysts have lowered their forecasts for oil, iron ore, copper and many other commodities in light of lower levels of expected demand going forward.
This is likely to have a negative effect on Billiton’s earnings and as commodity prices are forecast to remain significantly below those levels used when calculating their 2009 forecasts, this could result in a disappointment when the company updates the market in June.
If we combine our earlier analysis of the FTSE with the overbought technical conditions and concerns over their 2009 earnings, it suggests that the shares may continue their trend lower.
At the time of writing the share price is 1309p and I am a seller of any strength above 1350p. Near term targets are seen at 1285p, 1243p and 1155p, with a stop loss on the trade marginally below the February high of 1423p.
Other BHP Billiton news
- BHP Billiton says restocking in China "largely complete"
2009-08-12 - BHP Billiton introduces new pricing mechanism for iron-ore
2009-07-30 - Analysts expect upbeat BHP quarterly results on increased Chinese demand
2009-07-21 - BHP's high production in weak demand puts pressure on higher-cost producers
2009-05-09 - BHP expect market conditions to remain uncertain
2009-04-23
