Investors in mining giants BHP Billiton (LSE: BLT) (NYSE: BBL.US) and Rio Tinto (LSE: RIO) (NYSE: RIO.US) have had a rough ride for longer than you may realise.
Both stocks have posted a negative return over the last five years, falling 35% and 17% respectively in that time.
The big question now is whether BHP Billiton and Rio Tinto can post a positive return over the next five years.
Heavy Metals
Rumours of the death of the commodity supercycle clearly weren’t exaggerated, as demand for oil, metals and minerals has gone into sharp decline.
Once voracious consumer China has lost its appetite as it makes the uncomfortable transition from its export-led growth and infrastructure splurge to a mature consumption model.
The iron ore price fell 47% last year to hit a five-year low, and although it has climbed in recent days on hopes of a fresh Chinese infrastructure blitz, analysts suspect the recovery will be short-lived.
Peak Steel
There is a glut of the metal right now, to which BHP Billiton and Rio Tinto have been major contributors by ramping up production to record highs.
With production projected to keep rising, the iron mountain is unlikely to subside. Especially as President Xi Jinping desperately tries to end the country’s addiction to excess credit.
Other metals are also suffering, with the copper price at a four-year low. Aluminium, tin, zinc and nickel have all dropped lately.
Hot Money
The strong dollar and looming US base rate hike could put further pressure on emerging markets, further squeezing commodity demand.
Prices may get some respite if the Germans finally green light a regenerative blast of QE by ECB president Mario Draghi. But I suspect any QE, if it finally comes, won’t be enough to be a serious game-changer. The ECB isn’t the Federal Reserve.
Iron In The Soul
BHP Billiton and Rio Tinto are playing a dangerous game, ramping up supply as demand falls, in the hope of keeping the cash flowing and squeezing out smaller, higher-cost competitors.
Signs of share price stabilisation in recent weeks may nevertheless suggest that the worst may be over, for now
BHP Billiton looks more tempting to me, given its size and diversification, juicy 5.32% yield (covered 2.5 times) and undemanding valuation of eight times earnings.
Rio Tinto offers a less startling 4% yield. Its relative strength has surprised me, given its heavy exposure to iron ore, which makes up 90% of its production. I wouldn’t invest in the stock with much confidence right now.
The worst may be over for BHP Billiton and Rio Tinto, but I can’t claim with any confidence that the best is yet to come.
