Is It Time to Sell BHP Billiton's Rally?

Following the recent surge in crude oil and iron ore prices, shares of natural resource company BHP Billiton have staged an impressive rally. After having a rough start to 2016, BHP has broken even for the year. However, I don't think the stock can sustain the rally, which is why I think investors should sell the recent rally.

Jansen Potash Project

2015 was an awful year for BHP Billiton, as the stock lost almost half its value. However, things may change soon for the company. Recently, BHP Billiton decided to cut $130 million from the proposed $330 million capital outlays to develop and examine the viability of Jansen potash project in Canada.

At present, the project is completed around 55 percent and within the sanctioned budget of $2.6 billion.
Once the project is totally complete, the mine will generate around 8 million tonnes of potash each year and will have about 70-year resource lifespan. The marketable production for the Jansen project will begin post 2020. However, the project will require potash rates to surge to $400 per tonne to accomplish satisfactory rate of return.

On the other hand, the Uralkali and Belaruskali alliance helped potash costs to move higher from 2005 till they agreed to be apart in 2013. It is not likely that this two potash manufacturer will ever make a bond to work together in the future mainly due to trust concerns.

The entire worldwide capacity for potash is projected to reach 80 million tonnes in 2020, up from 66 million tonnes in 2014, whereas, potash demand is expected to reach 72 million tonnes in 2020, up from 62 million tonnes in 2014. Due to the huge gap between demand and supply, potash will be aggressively impacted, which have dropped to approximately $285 per tonne.

Apart from this, China surged iron ore costs above $50 per tonne. Iron ore producers should not be pleased with the surging prices, as China carries on to lower its growth estimate. Moreover, China strategies to decrease steel manufacture by around 100-150 million tonnes in 2016.

The Samarco dam tragedy made the company to pay approximately $1.15 billion. Furthermore, the supply gut by Vale, and Rio Tinto will augment descending pressure on iron ore rates and this could impact BHP’s cash flow and its credit rating in the forthcoming years.


To sum up, there are many tailwinds that can push BHP's stock lower. The steep rise in stocks is unsustainable and it's only a matter of time before the market reverses its course. Thus, I think investors should use the rally to sell the BHP rally.
Published on Mar 24, 2016
By Akshansh Gandhi

Copyrighted 2020. Content published with author's permission.

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