Rio Tinto Limited (ASX:RIO) and BHP Billiton Limited (ASX:BHP) are two of my favourite mining companies, but I would not buy their shares today.
Are BHP Billiton Limited and Rio Tinto Limited a clear sell?
As you can see in the far right corner of the chart above, the share prices of BHP Billiton and Rio Tinto have rallied over the past year.
Given both companies are resources businesses focused on producing commodities such as iron ore, coal, copper, oil (in BHP's case) and aluminium, both companies' share prices have soared in response to an increase in market prices.
Indeed, every single one of those commodities has rallied over the past 12 months. Iron ore, for example, is up over 101%.
The basis for the gains in iron ore, coal, copper and aluminium are often attributed to China's huge stimulus packages.
In 2015, China upped its stimulus to 17.6 trillion Yuan — the equivalent of $US 2.56 trillion (with a 't'). Still, its deficit widened.
For comparison, Donald Trump's election campaigning promised $1 trillion on infrastructure spending over 10 years. Some anecdotal evidence suggests that it is the equivalent of what China spent in nine months in 2016.
Another boost to BHP's share price is the rally in oil prices. This has come about because OPEC, a group of countries whose economies depend on oil to reach break-even, finally agreed that enough high-cost producers from the U.S. shale oil fields were forced out of the market and decided to cap production. OPEC capped production so prices would rally. And they have.
In summary, you can see why Bloomberg, Sky News, CNBC and every other financial news channel devotes so much of their time to understanding political decisions from China, the USA, OPEC and the rest.
That's too difficult for me.
Foolish Takeaway
What I'm trying to emphasise here is that while Rio Tinto and BHP Billiton are more likely than most to weather a downturn in commodity prices — they are heavily leveraged to the industry by nature and design. That means, if commodity prices fall, their share prices could also head south — and quickly.
If I were to pick one, I would choose BHP. But like I said at the beginning of this article, I'm not a buyer of any of them. And if I held shares I would want to make sure I'm not overexposed to the sector throughout 2017.
