Bargain hunters lift BHP Billiton Limited and Rio Tinto Limited shares

Credit: Lucas Walters

Shares in resources giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are up 4.1% and 3.7% today with some bargain hunters doing a spot of late Christmas shopping for these two beaten-down shares.

Rio Tinto shares are down 21% in 2015 and 47% since the start of 2011 – a time when China’s infrastructure and construction mega-boom was peaking as its demand for iron ore for building projects soared to levels far higher than anyone ever expected.

The inevitable slowdown from the ‘commodity super-cycle’ over the last five years means the share prices of businesses like Rio Tinto and BHP Billiton had nowhere to head but down. Whether they have further to fall or not is unknown, but it appears some investors think the bottom may be in.

However, despite the slowing demand growth for iron ore from China, both BHP and Rio Tinto continue to increase supply in a Machiavellian battle for market share that has left some rivals “hanging on by their finger nails” according to Rio Tinto’s chief Sam Walsh.

As the world’s lowest-cost producer Rio Tinto has zero incentive to voluntarily cut production and Mr Walsh’s barb looks aimed at rival Andrew Forrest the boss of the heavily indebted Fortescue Metals Group Limited (ASX: FMG).

Mr Forrest spent much of 2015 complaining about the overproduction of rivals and even publicly campaigned for a government inquiry into the production strategy and activities of the mining “multinationals” in Australia such as Rio Tinto.

This strategy won’t win Fortescue any friends or favours and investors should expect Rio and BHP to continue to flood the iron ore market with supply in 2016 in an unwillingness to cede market share.

As suggested multiple times previously, iron ore investors will need to take a long-term view as the the general consensus is that prices are unlikely to pick up before 2018, unless rival producers are forced into insolvency before then.

I expect the big iron ore miners will trade sideways out to 2018, with a tough outlook for the small players.

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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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