Rio Tinto plc And BHP Billiton plc After The Mining Supercycle

What the future holds for mining giants Rio Tinto plc (LON:RIO) and BHP Billiton plc (LON:BLT).

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The world’s population is growing, and people are becoming wealthier and wealthier. This means that its need for resources such as metals and minerals has been growing at quite a pelt.

The rise of China has been one of the stories of the past three decades. The transition of this nation from a farming economy to one of the world’s industrial giants has meant that it has consumed metals and minerals like no nation has before.

Much of China’s infrastructure has already been built

But, after so many years of boom, it is now undergoing a second transition: to technology, services and the consumer. Much of the infrastructure that can be built has been built.

With talk of ghost cities and over-investment, I suspect that the pendulum has now swung away from investment in infrastructure to investment in research and in technology.

And this means to me that China’s consumption of commodities such as iron ore and copper will fall. This perhaps means that the mining supercycle that has pushed up commodity prices to record levels is drawing to a close.

So iron ore and copper prices are falling. And the share prices of miners have also fallen.

Yet this bearish viewpoint is tempered by the fact that there are several countries across Africa, Latin America and Asia that are ramping up their commodities consumption as they industrialise.

A gradual downtrend

I suspect the net effect is that commodities prices, and the share prices of mining companies such as Rio Tinto (LSE: RIO) (NYSE: RIO.US) and BHP Billiton (LSE: BLT) (NYSE: BBL.US) are likely to gradually taper rather then suddenly crash to pre-boom lows.

 A check of the share price charts confirms this long-term picture: Rio Tinto’s share price has had a strong upwards trend that peaked in 2008, which was perhaps the apogee of China’s building boom. Since then, there has been a gradual downtrend.

The viewpoint is similar if we look at BHP Billiton’s share price: BHP’s uptrend peaked slightly later, in 2010, and since then there has, again, been a gradual downtrend.

But, as I say, as other emerging countries are picking up the slack from China, the price falls will be cushioned.

Mining companies look reasonably priced on a P/E ratio basis. Rio Tinto has a P/E ratio of 9.6, while BHP Billiton has a P/E ratio of 13.4 — though BHP also has much less net debt.

But, be careful: P/E ratios of mining companies should be viewed with a touch of scepticism, as commodity price falls can rip holes in P/E ratio forecasts.

Overall, there still is a future for mining companies, but I suspect that these companies are now retrenching as metals and minerals demand is falling. Personally, I can find better buys elsewhere in the stockmarket.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Prabhat owns shares in none of the companies mentioned in this article. The Motley Fool owns shares in Tesco.

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