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1 reason I wouldn’t buy Rio Tinto Limited and BHP Billiton Limited shares in 2017

The rise and rise and rise of the Rio Tinto Limited (ASX: RIO) share price and BHP Billiton Limited (ASX: BHP) share price has raised a few eyebrows.

BHP share price and RIO share price

Source: Google Finance

Source: Google Finance

The recent share price rally of these two mining heavyweights can be put down to one thing: commodity prices.

According to indexmundi.com, the prices of key commodities have soared over the past 12 months:

  • Iron ore: up 92%
  • Copper: up 28%
  • Aluminium: up 21%
  • Oil: up 80%
  • Gold: up 9%
  • Uranium: down 36%
  • Thermal coal: up 69%

BHP and Rio Tinto both produce iron ore, copper, coal and the ingredients that go into aluminium, in vast quantities. BHP also has significant onshore US oil interests.

Is the rally sustainable?

If you bought shares in BHP and Rio Tinto last year, well done — you would have made a mint. In the short term (less than three years), picking the bottom of a share price is not easy. In fact, I’ve failed to do it so many times that I call it ‘luck’. 

Over the ultra-long-term, however, an investment in Rio Tinto and BHP shares would also have been rewarding, with both producing dividends and very modest share price gains over the past 15 years.

However, I’m sceptical that the recent rally can continue.

According to Commonwealth Bank of Australia (ASX: CBA) analyst Vivek Dhar, iron ore prices will end the year at $US60 per tonne. It traded $US 96 per tonne in China earlier this week.

Obviously, iron ore is not the only thing they produce. But it is a big contributor to both companies’ sales and profits. And although they won’t go bust at $US60 per tonne — it would be a hit to their profit.

Foolish Takeaway

In investing, no one can guarantee you a return. And when it comes to commodities markets, especially those dependent on Chinese government policy, it can become even more difficult to get any idea of where the market will head next. That’s why I wouldn’t buy Rio Tinto or BHP Billiton shares in 2017.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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