A: This is a really good question, particularly following yesterday’s BHP operational review. This foreshadowed production decreases in FY16 in 4 key commodities:

Petroleum by 7%
Copper by 12%
Metallurgical Coal by 6%
Energy Coal by 2%

Iron ore is forecast to grow by 6%, with BHP’s share of production in FY 16 rising to 247m tonnes.

Why to keep BHP? I think there are 3 reasons to consider:

a) History shows that commodity cycles, in particular the extent and duration of the upswings or downswings, are largely unpredictable. Clearly, we are in a downswing in commodity prices at the moment – how much further this goes, and how long it lasts, is the $64 question. Keeping some exposure to BHP now offers this upside potential;

b) Of the commodity majors (and in Australia, it is really only a choice between BHP and RIO), my preference is BHP due to a broader mix of commodities (RIO earns more than 90% of its revenue from iron ore – I think this has material over-supply issues); and

c) BHP has made a commitment to pay a sustainably increasing dividend. If commodity prices continue to fall, this commitment may be seriously challenged – so take this into account, however on paper, BHP will be yielding around 6.4% – fully franked! A possible income stock!