Sometimes I feel likethe last living investorwho made a profit from the mining sector, through my short-lived dalliance withBHP Billiton (LSE: BLT). Itseemed a pretty straightforward decision to sell it a couple of years ago. China had been slowing for several years and this seemeda clear sign that the commodity super-cycle wouldpuncture at some point. And when super-cycles puncture you cant patch them up with a quick repair job.
Cycle killer
So I dumped BHP Billiton and have been feeling pretty smug about it ever since, with the stock crashing62% since then. It isnt every day that you spot the end of the super-cycle and I only wish I did it more often. But forget past glories, the question now is when will the cycle swing upwards for BHP Billiton and other miners such as fellow FTSE 100 giant Rio Tinto (LSE: RIO)?
Lets make one thing clear:I dont think the super-cycle will return in the foreseeable future, and maybe never. The China growth story was a one-off historical event that happened before our very eyes, one that lifted 400m people out of poverty and turned the communist basket case into a world economic superpower. That story isnt over. China isnt returning to a world of blue Maosuits and rural poverty. Instead itsbecoming more like us, a nation of consumers rather than industrialists, producers and exporters. That means its mania for metals and minerals will be tempered. In fact, its government policy. Hard or soft landing, nothing will change that.
Mining misery
That doesnt mean that commodities will fall forever. At some point, prices will bottom-out. That will take some timeas there is still just too much supply. Start-up costs are the big hurdle when drilling a new mine, once the hole is there you might as well keep emptying it. This has kept production high and the subsequent metals glut has forced commodity prices even lower.
BHP Billiton and Rio Tinto have contributed to the stockpilesin the hope, Saudi style, of driving out smaller-scale, higher-cost rivals. Their economies of scale should eventually outmuscle the seven-stone weaklingsbut in the meantime the pain will continue for investors. Prices for iron ore, copper and aluminium are forecast to fall further. S&P has just downgraded BHP Billitons credit rating and is said to be consideringthe same fate for Rio Tinto. BHP Billitons 13.6% yield, covered just once, must bow to the inevitable.Rio Tintos may have more staying power, yielding 9.2% covered 2.3 times,but this cant go on forever. At leastBLTs total net debt of$24.4bn and Rios $13.68bn arentimmediate market concerns, even ifthey look like big numbers to me.
Pain Before Gain
I wouldnt buy either of these stocks today on the assumption that demand is going to pick up, as I cant see that happening. BHP Billiton and Rio Tinto wontstart growing until supply has slumped and the glut has cleared, and I foreseeplenty morepain before we hitthat point.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.