Why the BHP Billiton Limited share price has surged 12%

Credit: Lucas Walters

It’s been a difficult year for shareholders of BHP Billiton Limited (ASX: BHP), but the miner’s shares have skyrocketed over the last two sessions offering investors some hope.

Incredibly, BHP’s share price rallied 8.3% on Thursday as shares of resource companies skyrocketed. It’s added another 3.6% today and is trading at $16 (it hit a high of $16.17 earlier) after trading at a low of just $14.17 per share on Wednesday. Shares are up a total of 12.1% since Wednesday’s closing price.

Indeed, the rally has been sparked by renewed hopes that commodities may be near finding a bottom. BHP’s performance has been severely tarnished as a result of crashing commodity prices – particularly iron ore and oil – but both have risen strongly in recent weeks.

Oil prices declined 2% overnight to around US$34 a barrel, but that’s still a huge improvement on the US$27 a barrel it traded for recently. Meanwhile, iron ore rose another 2% overnight to US$45.52 a tonne, up considerably from a seven-year low of around US$38 a tonne late last year.

BHP’s rivals are also benefiting from the sudden rebound in sentiment within the sector, with shares of Rio Tinto Limited (ASX: RIO) and South32 Ltd (ASX: S32) also rising strongly again today.

Before investors get too excited however, it’s important to note that there are still some strong headwinds facing the sector. To begin with, China’s growth is slowing down, and will continue to do so over the coming years.

China has for so long acted as the engine room behind the global economy’s growth, and thus has accounted for a significant portion of demand for the world’s resources. While demand is waning however, excess production from the world’s biggest producers is forcing prices lower, with most analysts suggesting that the recent rebound in iron ore and oil prices will only be temporary.

BHP’s shares can bounce at the first sign of a recovery, but they can also fall hard when prices start to fall. For that reason, I think there could be more pain for shareholders of BHP Billiton over the coming months.

Of course, I could be wrong, but I don’t believe the risk vs. reward trade-off is compelling enough to take a chance with the shares right now, especially when there are so many other opportunities presenting themselves to investors.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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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