It is been remorseless and it has been devastating. The shares of big mining companies like BHP Billiton (LSE: BLT), Rio Tinto (LSE: RIO) and Fresnillo (LSE: FRES) have been routed.
In 2010 the share price of BHP reached 2,434p. This week it has fallen to 867p. In 2008 Rio reached 5,288p. It now stands at 2,130p. And Fresnillo has fallen from 2,150p to 959p. The question is: will there be an end to this share price carnage?
The commodity price issue
Well, the reason for the share price falls is clear to see: it’s all about crashing commodity prices. The mining resurgence of the last 15 years had led to massive investment in new mines and production capacity, as companies rushed to meet the demand of China’s building and infrastructure boom.
But what comes after a boom? Demand for metals and minerals is now falling as China’s growth has matured and therefore has slowed down. Yet all these miners are still producing at full pelt. Iron ore prices have now fallen from a high of $187 per dry metric ton to $41 per dry metric ton.
The impact on earnings has been quickly felt. In its recent results, BHP Billiton sank to a $5.67bn loss for the six months to December 2015, compared to a profit of $5.35bn in the corresponding period of 2014. And revenues also tumbled, by 37%.
That is a frighteningly sharp fall away in the fortunes of the company, and more-than-explains the share price slide. And the picture has been similar with other commodity companies. Rio Tinto has also posted a loss, losing $866m in 2015. And remember, this is a firm that sits on a worryingly large $13bn of debt.
And it’s not only the giants that have been suffering. The mid-sized miner Fresnillo has also seen its profits falling dramatically.
I expect the rout to continue
And the bad news is, I see little prospect of these businesses being turned around given general trends in the global economy. After all, the one thing you don’t do is fight a trend. The commodities supercycle has ended decisively, and I expect the price of minerals and metals such as iron ore to continue to fall. In the 1990s, the iron ore price used to sit at around $10 per dry metric ton, roughly a quarter of where it is now.
Thus share prices in this sector will continue to be eroded. There will be no dramatic rebound to this rout. Now, as a writer I always try to see the positive side of things. But if you were to ask me what the future holds for mining companies, I would have to say the worst is yet to come.
