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Why Goldman Sachs just downgraded BHP Billiton Limited shares

Credit: Lucas Walters

Analysts at investment bank Goldman Sachs have just cut their rating on mega-miner BHP Billiton Limited’s (ASX: BHP) London shares from £14 to £11, suggesting that several catalysts could weaken the business over the next 12 months. BHP’s London shares last traded at £12.

News reports suggest that Goldman is worried that a weakening Chinese steel market could cause commodity prices to fall again, with coal and iron ore accounting for half of BHP’s operating earnings. Surprisingly the bank kept its rating on Rio Tinto Limited (ASX: RIO) at neutral despite Rio being exposed to many of the same forces that affect BHP.

The vagaries of Chinese industry are certainly very relevant to shareholders of Australian miners, with most of Australia’s resource exports heading to that country. With lower commodity prices, both BHP and Rio could report lower profits and cash flows, which may hurt their dividends.

Like many other forecasters, Goldman Sachs has had a mixed record in the past when it comes to predicting market movements. There are too many uncertainties to be right all of the time, and as a result I would be wary of basing my investment decisions on the latest upgrades or downgrades from investment banks. These recommendations often look just 12 months into the future, which is not ideal for long term shareholders.

In this situation however, their warning could be proven accurate. As we’ve seen recently a number of Chinese companies have come under pressure, with several steel and construction companies defaulting on their bonds.  The Chinese government also aims to reduce the country’s steel production, as it is oversupplied, and this would likely have a negative effect on demand for iron ore and coal.

I’m not a buyer of any of the major miners at today’s prices.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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