If you’ve been following BHP Billiton [ASX:BHP] then you’ll know shares have been rallying recently. BHP’s share price has climbed for the past five days. However, their run was put to an end yesterday when shares dropped 1.8%, to $18.21. The five-day rally was the first time this year that BHP was able to achieve this feat. Across those five days, BHP added 19.14% to their share price.
It didn’t seem like the mining sector was going to turn around. But news surrounding BHP has ramped up in the last week.
Their credit rating was endorsed by Standard and Poor’s. This strengthened the idea that BHP’s dividend cut was a good move. They were able to free up cash flow that they otherwise wouldn’t have had the option of doing.
The Brazilian dam fiasco also finally came to a conclusion. BHP is now sticking to a 15-year agreement with the Brazilian government, paying $3.2 billion.
So, with the pressure lifting off BHP, shares had only one place to go — up.
BHP was not alone in the rally. Other miners, like Rio Tinto [ASX:RIO], rallied for six consecutive trading days. Rio was able to add 16.75% to their share price, reaching positive territory for the year. The graph below shows BHP and Rio’s share price performance so far this year.
Source: Yahoo Finance
However, the mining rebound may now be over. The whole sector has screeched to a halt because of shocking trade balance figures coming out of China.
China continues to slow down
China’s trade balance was expected to decrease from US$406 billion to US$339 billion in month on month figures for February. However, figures shocked the market when they almost halved from January’s number, coming in at US$210 billion.
Exports were down 20.6% year on year, and imports were down 8%. The overall drop is just shy of the record monthly drop of 26.4%, which came around the same time as the global financial meltdown in 2009.
The drop is just a reminder of what we already knew in 2016.
China is slowing down. Their exports are especially frightening, as they likely indicate a slowing manufacturing industry.
And trade balance figures weren’t helped either by falling US demand and seasonal distortions. But, for our purposes, import figures were an important issue for miners. The level of imported commodities can give miners a rough idea as to the level of demand for their resources.
China did not discriminate as a number of key imported commodities declined over the month. Iron ore was down 10%, coal down 11%, and copper down 5%.
Overall China’s trade balance surplus has dropped by almost 50%, to US$32.6 billion. Fears that demand for commodities isn’t picking up scares the whole mining sector.
Low prices persist
Not only is demand for commodities low, but prices are still staying at rock bottom prices. Overnight, copper fell 2.6%, to US$4868 a tonne, on the London Metal Exchange. It was only last week that copper hit a four month high of US$5,059 a tonne. The recent retreat was copper’s biggest one-day fall in four months, adding to global pessimism.
Coal is also staying low at US$43.58 a tonne on the New York Mercantile Exchange. BHP’s Mount Arthur mine has been affected the most by low stained coal prices. The average price of Mount Arthur coal has gone from US$461 a tonne in the second half of 2014 to US$49 a tonne at the end of 2015.
Tight margins have forced BHP to cut 290 jobs from the Mount Arthur project. BHP announced yesterday the mine lost $12 million in the second half of 2015. The cuts are just one way BHP is tackling the problem.
Mining and Energy Union district president, Peter Jordan, said after BHP made their announcement:
‘It is well known at the mine that the contractor workforce employed by Chandler Macleod has been growing in recent weeks, and in a court case after an earlier round of Mount Arthur redundancies a BHP document was tendered showing their intention to lift their contractor level to 40 per cent of the total workforce.’
BHP of course blames falling coal prices as a response for the need to restructure the mine. Global demand for thermal coal has fallen by ‘an average realised price of 27 per cent’ in the past 18 months.
The job cuts are to be finalised within the next three months. But it’s not the only problem BHP has to worry about. BHP might be in for a rough day of trading, as the stock fell in London trade overnight, dropping 8.51%.
Some believe the big miner rallied last week just to be sold back down. Whether this is true or not remains to be seen. But China’s troubles are resurfacing. And miners could be back under the market’s thumb.
Junior Analyst, Money Morning
PS: There are plenty of mining stocks out there trading for almost half of their value. Stocks like Rio are trading 25% lower than early last year. And BHP is almost half of its price in early 2015. A lot of investors are now looking to mining stocks as a great way to make quick money. Share prices are so low; sometimes the only place they can go is up.
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