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Even the BHP Billiton Limited boss is bearish on iron ore prices

Credit: Lucas Walters

No wonder the BHP Billiton Limited (ASX: BHP) share price is on the nose with reports in the Fairfax press suggesting that even its own chief executive is bearish about the direction of commodity prices.

Fairfax reported that the BHP boss, Andrew Mackenzie, told a business dinner on the subject of commodities: “We’re relatively bearish about the long-term projections for prices”.

Statements like these should set loud alarm bells ringing for anyone holding or considering investing in resources shares like BHP, Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG).

In particular iron ore prices look unlikely to rebound sustainably higher over the medium or long term.

Fortescue is a company built on debt and iron ore accounts for around 97% of its revenues. This means its outlook is moderate at best and long-term investors are unlikely to enjoy much in the way of returns as the company continues to slash costs. Given the debt profile it also carries a significant amount of risk to the downside.

Rio Tinto’s earnings are also highly leveraged to iron ore prices and the outlook for the stock also looks moderate at best given the fact that global supply now seems more than enough to cope with post-boom Chinese demand.

BHP is probably the best bet of the big three given its more diversified earnings base, with oil’s medium term outlook perhaps better than iron ore as global demand is likely to grow over time.

BHP shares sell for $18.03 today, although investors should remember markets are forward looking so considering it cheap on the basis of its previous prices is a big mistake.

Moreover, given the CEO is not optimistic about the outlook for commodity prices it may be time to forget BHP and consider the new breed blue chips…

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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