BHP and Rio Tinto stumbled in 2024. Should you buy the dip this year?

2024 was a challenging year for the resources sector, with heavyweights like BHP (ASX: BHP) and Rio Tinto (ASX: RIO) recording declines of -21.5% and -13.4% respectively.

As commodity prices attempt to stabilise and further interest rate cuts kick in – Could 2025 mark a turnaround for the all-important sector?

Citi – "Too early we reckon"

Citi remains cautious on the sector, suggesting it is too early for a broad-based re-entry due to ongoing macroeconomic challenges.

"We continue to see the mining sector facing strong headwinds as global growth remains subdued and near-term commodity prices linger at lower levels," the analysts said in a note on Thursday. The restrained outlook is grounded in three key factors: Global manufacturing data, the Australian dollar and China’s growth prospects.

China’s PMI for new orders – an indicator of new demand in manufacturing – entered expansion territory in December. However, the global manufacturing PMI fell back into contraction, with a reading of 49.6 (below the neutral 50-point mark that separates expansion from contraction).

Source: JPMorgan, S&P Global PMI

"This divergence between weak manufacturing activity and stronger global services PMI reflects a sustained shift towards a consumption-driven recovery. For Australian miners, these trends are concerning," the analysts warned.

The Australian dollar, often seen as a proxy for commodity prices, poses another challenge. While a weaker AUD boosts miners’ earnings when converted from US dollars, Citi says this dynamic has "historically not been a positive for the relative performance of the Australian mining sector.”

AUD/USD (blue) vs. S&P/ASX 200 Materials Index (red) indexed to 100 | Source: TradingView

Citi projects China’s GDP growth to slow to 4.2% in 2025, with stimulus measures likely to remain reactive rather than proactive. These conditions are expected to weigh on the metals market, prolonging a difficult environment for miners through much of the year.

Valuations and Sentiment

Despite improved valuation metrics for major miners like BHP, Rio Tinto and Fortescue, Citi advises caution, noting that risk appetite levels are not yet strong enough to justify aggressive buying.

"Risk appetite gives a strong Buy signal when risk appetite is very low and valuations are depressed. Neither requirements are fulfilled at this point," the report said.

BHP’s risk appetite, which was neutral at the start of 2024, has shifted slightly negative. Valuations for BHP and Rio Tinto have pulled back but remain above levels that would warrant a confident re-entry by investors.