Jefferies downgrades BHP Billiton, says commodity prices will drop

Jefferies downgraded miner BHP Billiton to ‘hold’ from ‘buy’, as it argued that commodity prices are set to decline.

It pointed out that even after Tuesday’s “carnage”, the share price is still above its 800p target price as commodity prices have been stronger than expected, sentiment on mining has improved, and shorts have covered.

“While the Chinese demand outlook may be slightly better than it was two months ago and more metals-intensive stimulus may be coming, our analysis indicates that most commodity prices will go lower in the near term,” Jefferies said.

It said the recent strength in prices of iron ore, copper and other mined commodities will at least partially reverse over the next three to six months.

As far as iron ore is concerned, supply growth from Roy Hill and a seasonal increase in supply following what have been typical weather-related supply disruptions should pressure the price, especially if demand stays weak, Jefferies said.

It expects the iron ore price to fall to below $40/t this summer from current spot of $64/t.

As for copper, it said a wave of supply growth should more than offset any improvement in demand and push prices lower.

“Based on our commodity price forecasts rather than current, higher spot prices, BHP's valuation is stretched,” Jefferies said.

“In addition to a fairly expensive valuation (on our estimates) and the likely negative momentum of lower commodity prices in the near term, there are also still questions regarding BHP's recently announced strategic overhaul, which includes major changes to divisional management and a regrouping of segments.”

At 0905 GMT, BHP shares were down 1.9% to 17.86p.