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47.1 Reasons Why BHP Billiton plc, Rio Tinto plc And BG Group plc Remain High-Risk Stock Selections

At first glance, the market outlook for diversified mining giants BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO) and oil producer BG Group (LSE: BG) received a much-needed fillip overnight with the release of Chinese factory data for February.

The HSBC/Markit Chinese PMI report for the manufacturing sector showed activity in the country flip back into expansion this month, rising to 50.1 from 49.7 in January. This is also the first move back into positive territory since October.

Foreign shipments hit the rocks

However, dig a little deeper and it becomes obvious that all is not as rosy as it first seems. Indeed, the survey showed that new export orders declined to 47.1 this month, the first drop since last April and the fastest monthly decline for 20 months.

Following the data, HSBC economist Qu Hongbin noted that although the figures illustrate “a marginal improvement in the Chinese manufacturing sector going into the Chinese New Year… domestic economic activity is likely to remain sluggish and external demand looks uncertain. We believe more policy easing is still warranted at the current stage to support growth.”

The People’s Bank of China elected to cut interest rates in November for the first time in two years, and cut the capital reserve requirements of local banks in order to stimulate lending earlier this month. It has also chucked $1.1bn at the construction sector to accelerate dozens of building projects.

But both Markit and HSBC are convinced that Beijing will have to press the trigger again to stimulate domestic consumption, a critical requirement as demand from foreign markets looks shaky at best.

Growth slowdown bodes ill for commodities demand

This week’s release has done nothing to assuage fears that Chinese natural resources demand looks set to keep on tumbling, a point exacerbated by Markit’s comments that “the ongoing weakness of the survey data in February adds to the likelihood of economic growth slowing further in 2015, after the weakest expansion for 24 years was recorded in 2014.”

China is the second largest oil consumer behind the United States, bad news for the likes of BG Group. And for Rio Tinto and BHP Billiton, signs of further cooling in the steelmaking industries threatens to hammer revenues — the Chinese swallow two-thirds of the world’s iron ore imports. Given these factors, I believe that all three companies are in severe danger of prolonged earnings weakness.

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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.