The BHP Billiton Limited (ASX: BHP) share price crossed the $19 mark today after falling to a low of just $14.06 earlier in the year. It has been one of the best-performing blue-chip shares since then in a rally fuelled by the rebounding iron ore and oil prices.
Indeed, the shares hit a high of $19.44 today – representing a 4.8% gain compared to yesterday's closing price – earlier in the session, which was their highest point since late in November, 2015. Now back at $18.85, it puts those investors who bought in around the bottom on a paper gain of roughly 34%.
Today's gains are most likely attributed to the incredible performances in the commodities market overnight, which saw the iron ore price experience its strongest single-day rise since at least 2008. The resource surged 18.6% to US$63.75 a tonne, according to The Metal Bulletin, while Brent crude oil also rose another 5.4% to trade at nearly US$41 a barrel.
As nice as it is to watch BHP's shares surging higher, a word of caution is needed for those investors who have – or are thinking about – buying in.
On the one hand, the rally may have been caused by expectations for greater demand based on stimulatory measures being undertaken by the Chinese government to drive economic growth over the coming years.
However, it's also possible that Chinese steel mills in the city of Tangshan are bringing forward their production before an international horticultural show between April and October this year. This show could see an enforced shut-down that significantly limits the output from producers in order to reduce pollution for the event, which could see prices fall again (as they did in 2015).
The share prices of companies such as BHP Billiton, Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) may continue to rise (although Fortescue's shares have actually fallen 7.5% so far today) if the iron ore rally holds up, but there's also a risk of heavy losses if the iron ore price does suddenly reverse course.
Obviously, every investor will have their own opinion and tolerance to risk, but it's something to keep in mind before buying into the action.
