Market sentiment towards mining giants BHP Billiton (LSE: BLT) (NYSE: BBL.US) and Rio Tinto (LSE: RIO) (NYSE: RIO.US) seems to change with the weather.
Or rather, the economic weather coming out of China, which has been somewhat cloudy lately.
So news that Chinese factory output fell by more than expected in November is another disappointment for both stocks. The Chinese housing market and related sectors such as steel and cement manufacturing are both in decline, hitting demand for natural resources.
Cliffhanger
As if that wasn’t enough, as Australia’s biggest oil exporter, BHP Billiton has also been knocked by the plunging oil price.
No wonder its share price has fallen off a cliff in the last three months, down 18% in that time. That is twice the 9% drop suffered by Rio over the same period.
This isn’t a temporary slump but a long-term malaise, as five-year performance figures reveal. In that time, BHP Billiton has dropped nearly 25%, while Rio Tinto is down more than 10%.
This sector has been losing you money longer than you think.
No Growth
Existing investors can hang on hoping for a reversal. New investors could even dive in, hoping to make a contrarian splash. The valuations look tempting, with BHP trading at less than nine times earnings, and Rio just over 13 times.
Both are now dividend income machines, yielding 4.82% and 4% respectively. That’s quite a turnaround for companies that were originally seen as a play on fast-growing emerging markets.
Supercycle Me
Both BHP and Rio are well managed, and have been diligently cutting costs, reducing exploration spend, boosting cash flow, and ramping up production.
But investors need to ask themselves this question: what on earth has happened to the much-vaunted commodity supercycle?
By taking copper and iron ore production to new highs despite falling prices, BHP Billiton and Rio Tinto are either pretending the supercycle is still spinning, or playing a Saudi Arabian-esque game of taking a short-term hit, knowing that higher-cost, lower-output rivals will take a far bigger hit in the longer run.
It’s Gonna Rain
It’s a dangerous game to play. Especially with Chinese GDP growth down to 7.3%, the lowest since the financial crisis. The real figure may be lower than that.
The sun could shine on BHP Billiton and Rio Tinto’s favour on Thursday, if European Central Bank president Mario Draghi finally unleashes QE on an expectant world.
If he doesn’t, investors could face more heavy weather in 2015.