Citi just downgraded BHP Billiton and Rio Tinto to 'sell'

Ryan Pierse/Getty Images

Shares of BHP and Rio fell heavily in London trade overnight, dropping more than 4% each after Citibank released a report downgrading Australia’s mining giants from neutral to sell.

The bank says that even though “2016 has been the year of the bulk commodities and both BHP Billiton and Rio Tinto have rallied strongly on the back of higher bulk commodities”, prices are elevated and will fall back, taking the miners’ stock prices with them.

BHP and Rio ASX price daily versus front US Iron ore futures (Source: Reuters Eikon)

Yesterday’s trade data revealed that China imported a billion tonnes of iron ore in the last 12 months. But the bank says the pullbacks in bulk commodities will be significant “in late-16 and into 2017 as demand cools and supply responds”.

They say that:

China monetary stimulus and supply restrictions have driven a surge in bulk prices in 2016… coal in particular has benefitted from capacity restrictions that are now being eased, which combined with recovering production from Australia and the end to seasonal restocking, is expected to drive thermal coal back to

Throw in the fact that “a number of cities in China are applying restrictions to cool house prices (YTD 20 cities), which we expect to result in lower Chinese steel production in 2017” and Citibank has downgraded BHP and Rio with price targets of “A$20/sh for BHP Billiton and A$47/share for Rio Tinto”.

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