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

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.

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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.