Another week, another 5% knocked off the share prices of FTSE 100-listed mining giants BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO). The stocks are now down 40% and 30% respectively over the past 12 months as sentiment swings conclusively against the mining sector, stricken by China’s intensifying crisis.
The consensus is that the much-heralded commodity supercycle is now punctured and was probably a myth anyway. With signs that the global economy is slowing, even outside Asia, the downside will continue. That is something almost everybody agrees on today.
Land Of Opportunity
When everybody agrees on something, investors should sit up and take notice. Often, everybody is right (the wisdom of crowds and all that) but sometimes it heralds great opportunities.
Now Rio Tinto has given contrarians something tasty to chew on, producing “rigorous analysis” suggesting that demand for iron ore and steel will continue to grow despite the slowdown in China. It predicts that global demand for steel will rise by 2.5% a year for the next 15 years, and Chinese crude steel production will hit around 1 billion tonnes by 2030. I was surprised by the bullish forecast, and so were markets, as the study prompted a 4% rally in both stocks.
It is a momentary flash of light amid the gloom for mining stocks. And it contrasts vividly with more bearish forecasts from BHP Billiton, which recently downgraded its estimates for peak Chinese steel production from between 1-1.1bn tonnes to between 935m and 985m. In today’s mining sector, good news doesn’t hang around for long.
Emerging Demand
In a rare burst of optimism, BHP Billiton said it did see greater prospects in emerging markets beyond China, where it expects steel demand to rise by 65% by 2030.
At today’s share prices, it won’t take much good news for BHP Billiton and Rio Tinto to shine again. That could come in the shape of further Chinese stimulus, as desperate policymakers attempt to blast the country’s hard landing back into orbit. On Friday, People’s Bank of China governor Zhou Xiaochuan has suggested the Chinese stock market slide is now starting to stabilise, which would help.
Even if China is growing at just 4% a year, instead of 7%, that is from a much higher base than before. As Capital Economics has pointed out, the country will add another $700bn to GDP this year, more than the Chinese mainland’s entire economy in 1994 (and bigger than Switzerland’s GDP today).
Juicy Income
Just as commodity prices overshot on the way up, they may well have overshot on the way down. If you are working up the courage to buy into current stock market falls, BHP Billiton and Rio Tinto may be the ideal place to start.
You can hook yourself amazing yields of 7.75% and 6% respectively (although continued low commodity prices would eventually imperil those). BHP Billiton and Rio Tinto won’t fall forever. A few more flashes of good news and they could quickly start to recover lost ground.
