Downgrades to BHP, Rio adds to gloom

Gloomy expectations that China will today release its weakest quarterly economic growth figures in three years were exacerbated when Credit Suisse downgraded its target share price for both BHP Billiton and Rio Tinto.

The bank's target price for BHP was revised from $45 to $35, while Rio Tinto's was revised from $90 to $70, based on the expectation that weakening commodity prices will shrink earnings by 32 per cent and 20 per cent, respectively.

The news accelerated a bad day on the markets for resources stocks, pulling the two major miners down by more than 2 per cent, and delivering hits of 6 per cent and 4 per cent to Fortescue Metals Group and Atlas Iron, respectively.

Shares in BHP and Rio have closed lower every day for more than a week, and the $30.40 that BHP was fetching last night is the stock's lowest ebb since March 2009.

As with Merrill Lynch and other big banks in recent days, Credit Suisse's thinking was driven by downward revisions for most commodity price forecasts, including those of most importance to the Australian economy: iron ore, thermal coal and coking coal.

"While commodity prices will remain well above the average of recent decades, it is likely that many have peaked for this cycle," said the Credit Suisse analyst note, led by Paul McTaggart.

But importantly for the local economy, the bank suggested that iron ore was one commodity that would enjoy higher prices.

Despite downgrading its own iron ore price forecasts 9 per cent, 8 per cent and 5 per cent over the three years from this year, Credit Suisse still expects benchmark iron ore prices to reach $US150 a tonne by mid-2013, well above yesterday's price of $US136 a tonne.

Dispelling suggestions of a sustained crash in iron ore prices, the bank is predicting a benchmark iron ore price of $US128 a tonne in 2014.

The Goldman Sachs analyst Richard Coppleson mounted a defence of the sector last night, declaring the negative sentiment surrounding Chinese demand for commodities was "overdone".

While China's June iron ore imports were lower than in May, he stressed the first half of this year saw China import more iron ore than in either the first or second half of last year.

"While a recovery in the short term is unlikely, downside risk is also limited and we expect a normalisation of demand going into 2013," he wrote.

The market volatility came on a landmark day for Rio, which announced that its chief financial officer, Guy Elliott, will step down next year after 32 years at the company.

Despite declaring that Mr Elliott would retire, it is understood he will continue to serve on other boards including at Royal Dutch Shell.