Why Rio Tinto plc and BHP Billiton plc are heading for a sea of troubles
The mining boom of the past 17 years has been impressive. A resurgent China has built roads, railways and homes across the Middle Kingdom, leading to massive demand for iron ore, aluminium, copper and other metals and minerals.
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This has led to the profitability and share prices of mining companies such as Rio Tinto(LSE: RIO) and BHP Billiton(LSE: BLT) taking off. Canny investors will have made a mint from buying into these firms at the right time.
Canny investors have made a mint from mining companies
At the peak of the boom, Rio Tinto's share price leapt to 5,700p and BHP jumped to 2,400p. But all good things must come to an end, and the end of the commodities supercycle has led to falling prices of metals and minerals.
Thus began a slide in mining share prices. Rio is now just 1,964p, and BHP just 7,93p. But is this the bottom? I fear not, and suspect the slide has more years to run.
There was a very substantial amount of investment over the past decade in new mines and mining infrastructure. In their rush to invest, these businesses built up their debts, and over-expanded. The result is a bloated industry that has been forced to cut back. And such cutbacks can be messy.
So we've seen tens of thousands of job losses in the mining industry, with mines being closed one after another. And countries that did best during the boom, such as Brazil, Australia, Russia and South Africa, are starting to feel the effects as belts are tightened.
The party's over
That's why I think mining hasn't yet reached a bottom. And if you view the big picture, you'll rapidly see that Rio Tinto and BHP Billiton aren't contrarian buys.
The numbers tell the story. In 2014, Rio Tinto made £4.175bn in net profit. In 2015, that swung to a loss of £1.16bn. Similarly, in 2014 BHP Billiton made a colossal £8.78bn in net profit. Yet by 2015 this had fallen to £2.791bn. And I suspect their profits will fall even further in years to come.
Make no mistake, the party's over as regards the mining industry. So if you're thinking of buying back into these companies at a cheaper price in order to make a quick profit, I would steer well clear. Instead I would advise investors who've sold out their holdings in the miners to rotate into more general stocks, notably into shares with a consumer products focus and that do much of their business in emerging markets.
Why do I say that? Because Rio Tinto, BHP Billiton, as well as other metal and mineral producers, are heading for a sea of troubles, and your money really would be better invested elsewhere.
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Prabhat does not own shares in Rio Tinto or BHP Billiton.
