The BHP Billiton Limited (ASX: BHP) share price is rising again today, moved by another monster gain in the iron ore price overnight. Indeed, the BHP share price has gained 0.8% to trade at $26.66 and has now risen 67% over the past 12 months.
This time last year, BHP, together with a number of other resources producers such as Fortescue Metals Group Limited (ASX: FMG) and Santos Ltd (ASX: STO), were languishing around multi-year low share prices as a result of plummeting commodity prices. Fast forward to today, those shares have also surged 324% and 27% respectively with iron ore and oil prices both rebounding strongly.
Given how strongly the iron ore price rose overnight, it's no surprise to see BHP's share price rising again. According to data from The Metal Bulletin, the commodity soared 6.5% to trade at US$92.23 a tonne. That is its highest price since August 2014!
As noted by The Australian, the most recent rally appears to have stemmed from data from China regarding its iron ore imports late last week. It may also have been bolstered by talk of favourable Beijing policy which could see fresh limitations placed on steel producers in China in order to tackle the country's low air quality. The paper quoted IG chief market strategist Chris Weston as saying "this is like a red rag to a bull for the speculators."
That brings us to an important question: Are the recent gains sustainable?
Rio Tinto Limited (ASX: RIO) seems to think so. In an interview with Bloomberg, the miner's CFO Chris Lynch said the commodity's price is unlikely to "fall off a cliff", although that is contrary to the expectations of many others. Indeed, 13 analysts' forecasts compiled by Bloomberg set the expectation for the commodity to trade for just US$55 per metric tonne by the end of the year, which would resemble a decline of more than 40% from today's price.
If China can continue to expand, and should it rely on imported ore to do so, our miners could certainly benefit from here. The problem is, if China does endure a slowdown, then demand for ore will likely drop which would leave the miners in a very precarious position.
The miners, including BHP, Rio Tinto and, in particular, Fortescue Metals Group, have done an incredible job of stripping costs from their business and are clearly enjoying the benefits of a rising iron ore price today. But investors need to ask themselves whether it is worth owning their shares today given the gains that have already been made from their shares, and from iron ore itself.
Iron ore could certainly continue to defy expectations from here. But if, like many of the analysts whose forecasts were compiled by Bloomberg, you believe iron ore has become overpriced and may endure a fall from these levels, I would recommend steering clear from the miners as well.
