I have been bearish on the mining sector for severalyears, and despite recent talk of an emerging markets revival Iremain negative. But I look like a raging bull compared to Harry Nimmo, respected fund manager at Standard Life. He reckons we shouldnt expect a recovery for, wait for it 20 years!
Nimmo sayshistorical data suggests amulti-decade downturn for commodities. He noted thatthere have been four super-cycles in metals prices over the last 300 years: The first was associated with the British industrial revolutions around 1830, then the rise of America as an industrial power in the late 19thcentury, then the reconstruction boom in the post-war era from 1945 to the mid-1960s and finallythe rise of China in the last 20 years.
With the Chinesesuper-cycle thoroughly played out, Nimmoreckons we can forget about the mining industry for two decades. Which is dismal news forFootsie-listed mining giants such asAntofagasta (LSE: ANTO) or Rio Tinto (LSE: RIO).
Both certainly look played-out today. Antofagasta is down 65% over the past five years, Rio Tinto is down 46% over the same period, which actually makes it one of the best performing big miners. Numbers like these will always attract contrarians but if Nimmo is right, now is too early to dive in. Two decades too early.
My concern about mining is that the sector has taken too long to wake up to the scale of the challenge ahead of it. FTSE big boys BHP Billiton and Rio Tinto have responded by ramping up production in a bid to grab market share and drive outhigh-cost competitors, with the inevitable impact on supply and price. The unspokenassumption is that China will be start gobbling up metals and mineralsonce its economy starts recovering, but I dont think that will be the case, as the country switches from infrastructuretoconsumption. Chinas super growth spurt is over, and may never return.
Chilean-focused miner Antofagasta will be punished for its focus on copper, a king without a crown now that markets question whether it can still be treated as a leading economic indicator. China has accounted for 50% of global demand but that is set to plunge. At around $4,666 a tonne theprice is at a six-year-low andGoldman Sachs forecasts itwillfall to $4,500 a ton by the end of next year. Antofagastas balance sheet may cope witha year or two of low prices, but 20 years is another matter.
Rio Tinto currently yields more than 6% which looks the best reason to buy the troubled stock right now, but the dividend certainly cant withstand a long downturn in commodity prices. With earnings per share forecast to drop 48% this year and 12% in 2016, there is clearly plenty of pain to come. You may be enjoying Rios dividend today but it wont stay at 6% for the next two decades, unless Nimmois wrong.
You might want to hang around until 2035 waiting for the next great commodity super cycle, but there are plenty of FTSE 100 stocks thatpromiseearlierrewards.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.