The commodity price crunch has taken its toll on mining giant BHP Billiton as two banks moved to slash the stock’s rating amid fears it will be forced to half its dividend.
Barclays downgraded the FTSE 100 stock to “underweight” as the collapse in commodity prices has left the miner “generating virtually no earnings”. “BHP is at a crossroads for its progressive dividend,” said David Butler, of Barclays. If commodity prices remain at current levels , the bank believes a dividend cut of 50pc will be “inevitable”, which would place its chief executive Andrew Mackenzie under further pressure, in the wake of the recent dam burst at Samarco.
Even a dividend cut of this magnitude would still require further cuts to the group’s capital expenditure, the bank said. In November, Jac Nasser, chairman, said in respect to the dividend versus the credit rating that “the balance sheet must always come first”. “We will never put it at risk.”
HSBC lowered BHP’s rating as it also sees the miner halving its dividend at its results. Ash Lazenby, of HSBC, said: “While weak producer currencies offer some support, continued renminbi weakening has negative commodity read-across.”
Just last week Anglo American was in the firing line, when Barclays issued a bearish note on the miner, warning: “Time is of the essence”. It said shares in Anglo were vulnerable due to the “lack of detail on timing” around the miner’s restructuring plan, which was announced recently.
In a sector wide note, Barclays also warned of an “uneasy year ahead” for commodities. The bank thinks the lack of growth momentum in the developed world, due to China-led malaise and the ongoing recession in emerging markets, such as Brazil and Russia, are likely to restrain any visible commodity demand recovery this year.
Despite swinging between gains and losses, BHP Billiton’s share price was unable to dodge the double downgrade. The FTSE 100 tumbled 18.2p, or 2.9pc, to 617.9p.
Mining stocks ended the day in the red after two banks downgraded BHP Billiton's rating. Photo: Reuters
Its peers also ended the day in the red with Rio Tinto down 2.7pc at 45p, Glencore fell 1.9pc to 72p and Antofagasta lost 3.5pc to 374.1p. However, Anglo American was among the top risers in early trade after it completed its exit from its Tarmac joint venture, following the sale of assets to a subsidiary of French construction group Bouygues. The FTSE 100 stock closed 0.9pc higher to 232.5p as a result.
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Meanwhile, it was a rally in retailers that helped the FTSE 100 make gains after industry data from Kantar Worldpanel and encouraging results from Morrisons supermarket boosted the sector. The blue chip index rose 57.41 points, or 0.98pc, to 5,929.24.
Sainsbury’s was the best performer in the 12 weeks to January 3, when sales rose 0.8pc, Kantar Worldpanel said. While sales in Tesco and Morrisons slumped 2.7pc and 2.6pc, respectively, discount retailers enjoyed stellar gains during the festive season, with sales in Aldi jumping 13.3pc. While a fierce supermarket price war has rocked the industry in recent times, investors welcomed the data.
Joshua Mahony, an IG analyst, said: “Tuesday’s news proves there may be hope yet for the traditional UK firms who hope to claw back ground despite the one-way battle that has been waging over recent years.”
Mid-cap supermarket Morrisons’ enjoyed its biggest daily rise in 11 years - up 8.7pc to 165.5p - after its results for Christmas trading period came in ahead of expectations. Shares in Tesco leapt 6.7pc to 155.2p, while Sainsbury’s advanced 3.2pc to 251.2p.
Housebuilders also enjoyed a leg up thanks to a bullish sector note from broker Jefferies. Both Barratt Developments and Berkeley Group received a rating upgrade, after the broker predicted UK-listed housebuilding stocks will outperform the overall stock market this year, as supply is unlikely to catch up with demand. Shares in Barratt Developments and Berkeley Group advanced 2.5pc and 3.8pc, respectively.
On the FTSE 250, Galliford Try leapt 4.3pc to £15.27.
Elsewhere, Irish drug maker Shire recovered from hefty losses on Monday when it announced that it would buy US rival Baxalta for $32bn. Shares climbed 189p to £41.14 after Credit Suisse upgraded the stock. The bank owed the move to the deal with Baxalta, which it described as a “solid strategic fit”.
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Melrose Industries benefited from some bid chatter in the City. A Sky report said the group was considering making an offer for the lighting division of Philips. The rumours lifted the stock 1.2pc higher to 283.5p.
On the other side, precious metal miner Randgold Resources tumbled to the bottom of the blue chip index after gold continued to fall for a third consecutive trading session, as European stock markets rebounded and the dollar strengthened. The gold miner slipped 163p to £41.88.
After tumbling 1pc on Monday, education giant Pearson recouped its losses - up 1.7pc to 694p - despite results from US rival Apollo Education pointing to a deterioration in the education market. Neil Campling, of Aviate Global, said there are significant headwinds facing the sector, namely, behavioural changes, college budgets, China, and regulation risk.
Mr Campling believes Pearson will have “a huge warning” when it reports its full-year results in February.
On Aim, NAHL, the group that owns National Accident Helpline, was among the top risers - up 20.5pc to 275p - following Monday’s announcement that it had acquired Searches UK.
Finally, Aim-listed Challenger Acquisitions, a group which invests in giant observation wheels like the London Eye, rose 1.4pc to 36.3p after it appointed two new directors, John Le Poidevin and Richard Marin, to the board. Mr Marin is currently chief executive of the $500m New York Wheel project in which Challenger has a 2.4pc share.
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