Why You Should — And Shouldn’t — Buy BHP Billiton plc And Rio Tinto plc

Royston Wild looks at the pros and cons of investing in BHP Billiton plc (LON: BLT) and Rio Tinto plc (LON: RIO).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I am looking at whether a turnaround is on the cards at mining goliaths BHP Billiton (LSE: BLT) (NYSE: BBL.US) and Rio Tinto (LSE: RIO) (NYSE: RIO.US).

Economic growth expected to drag

Fears that the world economy stands on shaky foundations continue to be fed by streams of disappointing news from all corners of the globe. From numbers showing Chinese manufacturing activity contracting, US retail sales falling the most for a year, and political upheaval in Greece casting fresh concerns over the fate of the eurozone, economic conditions in all regions appear to be on the slide once again.

The World Bank added fuel to these worries this week by downgrading its growth forecasts for 2015 to 3% from 3.4% previously, as well as slashing next year’s projection to 3.3% from 3.5%.

Following the World Bank’s announcement, bellwether metal copper — from which BHP Billiton sources 25% of total earnings and Rio Tinto closer to 30% — bombed to its cheapest since July 2009 around $5,300 per tonne.

Other base metals aluminium, zinc, lead and nickel also shuttled to multi-month and -year lows, while iron ore continues to fall following its bubbly start to the year, recently hovering around a five-year trough of $65.70 per tonne. Needless to say prices are likely to sink further in the event of more negative announcements.

Money pumping to the rescue?

Still, an environment of sluggish economic momentum has fed speculation that policymakers across the globe will follow Japan’s lead and embark on fresh waves of quantitative easing (or QE) sooner rather than later, a positive step for natural resources demand.

This week the European Court of Justice gave the green light to the European Central Bank’s Outright Monetary Transactions bond-buying scheme, a move that could herald the introduction of a much-awaited, full fat QE programme as soon as next week.

Meanwhile, many believe that streams of poor economic data flooding from China will also prompt Beijing to inject fresh waves of liquidity into the system. The People’s Bank of China has already embarked on a $1.1bn stimulus programme to accelerate hundreds of construction projects across the country, but with GDP growth continuing to slow from the rampant double-digit increases of previous decades, rumours are rife that the pumps could be switched back on in the near future.

Mining activity continues to surge

But even if the money printers provide the commodities sectors with a much needed shot in the arm, demand only represents one side of the coin and rampant supply across many markets looks set to continue outstripping off-take.

Indeed, improvements to Rio Tinto’s Pilbara operations in Australia have led to record iron ore volumes being recorded during January-September, while ramp-ups at its gigantic Oyu Tolgoi copper project and modernisation of its Kitimat aluminium smelter promises to drive output in these segments spiralling higher from next year.

This story is a familiar one, as the world’s largest diversified miners attempt to mitigate falling commodities prices by swamping the market with their own, low-cost material. But while the global economy remains in the doldrums — a situation which could take years to resolve — supply/demand imbalances across key commodities markets look set to keep resources prices underwater for the foreseeable future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

If I’d invested £5,000 in a Nasdaq index fund 5 years ago, here’s how much I’d have now

The Nasdaq index keeps hitting new all-time records in 2024, as US tech stocks fly. How much could I have…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£500 to invest a month? Consider aiming to turn that into a £20,000 passive income like this!

With a regular monthly investment, it's possible to build a large and steady passive income for retirement. Royston Wild explains.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Investing Articles

As retirement needs soar 60%, here’s how I’m building wealth with UK shares

A regular investment in UK shares and funds could help Brits create a large and lasting pension. Our writer Royston…

Read more »

Investing Articles

I’d buy Games Workshop shares before they reach the FTSE 100!

Games Workshop shares look likely to join the FTSE 100 soon. Here’s why I think investors should consider buying the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Could me buying this stock with a $2.5bn market-cap be like investing in Tesla in 2010?

Archer Aviation (NASDAQ:ACHR) stock's nearly doubled so far in November. Could this start-up be another Tesla in the making?

Read more »

Investing Articles

5,000 shares of this UK dividend stock could net me £1,700 a month in passive income

Our writer calculates the passive income he could earn from holding a significant number of shares in this powerful dividend-paying…

Read more »

Investing Articles

9.3%+ yields! 3 FTSE 100 dividend giants to consider buying

Our writer examines a trio of high-yield FTSE 100 shares and explains some of the opportunities and risks he sees…

Read more »

Investing Articles

As the Kingfisher share price drops on Budget fallout, should I buy?

The Kingfisher share price was on a strong 2024 run until the DIY group warned us of the possible effects…

Read more »