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3 reasons why the BHP Billiton Limited share price has surged 20%

Credit: Lucas Walters

The last few weeks have been great for shareholders of BHP Billiton Limited (ASX: BHP).

After watching their shares plunge to their lowest prices in more than a decade in January at just $14.06, the shares have risen steadily since. In fact, they’re currently changing hands for $16.88, up 1.6% for the day and 20% since bottoming out just over a month ago, heavily outperforming the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) during that period.

Here are three reasons why BHP’s shares might be performing so strongly:

  1. The iron ore price has been the cause of many of BHP’s issues in recent years as a result of swelling production combined with waning demand. After slipping beneath US$40 a tonne recently however, it has since rebounded to US$48.52 a tonne, according to The Metal Bulletin. Given that iron ore is BHP’s most important commodity, a higher price is certainly good for the group’s earnings. Notably, Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) have also risen strongly in recent weeks.
  2. As was the case with iron ore, the oil price was also languishing around its lowest levels in 13 years after suffering a violent start to the year. Although one barrel of Brent oil is still only fetching US$33 a barrel – down from roughly US$110 a barrel in mid-2014 – some economists believe the price may have finally found a floor, offering investors some hope.
  3. Notably, copper prices have also rebounded and traded at their highest levels in about two weeks on Friday, according to The Australian Financial Review. Copper is one of BHP’s four “pillar” commodities, and has risen based on brighter prospects for Chinese demand.

BHP Billiton’s earnings have come under severe pressure in recent years as a result of plunging commodity prices, and investors are desperate for them to find a bottom. As such, it is clear why investors have become more optimistic in recent weeks with these three commodities all finding some strength.

While that might be the case, investors also need to remember that further gains are not guaranteed. For instance, Liberum Capital believes that the iron ore rally will not last, according to a recent report from The AFR, while the oil rally has partly been built on the hope that the world’s biggest producers will reach an agreement to freeze output. Again, such an agreement is not guaranteed which means that oil prices could also retreat further from their current levels.

Based on the recent strength in commodities, it might be tempting to put some money to work in the sector. Of course, that could be a winning strategy if prices do continue to rise, but if they fall instead, those investors could just as likely be punished for doing so. For what it’s worth, I’m steering clear of the sector, for now at least.

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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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