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Are Rio Tinto plc And BHP Billiton plc Heading For A New Boom And Bust?

The mining sector is cyclical at the best of times, never mind during a recession — and the industry is only just coming out of a slump triggered by slowing Chinese growth and falling metals and minerals prices.

But are we heading for another boom and bust?

Over-production

Rio TintoOver-production was a problem in recent years, with output rising faster than demand — and that’s a surefire way to depresses prices. Iron was the key commodity in abundance, and while prices remain depressed there are worrying signs that we could be heading towards another glut.

Look at Rio Tinto (LSE: RIO) (NYSE: RIO.US), a constituent of the Fool’s Beginners Portfolio. In 2013, iron ore accounted for half of Rio’s turnover, and in April the company reported record first quarter iron ore production of 66.4 million tonnes — up 8% on the first quarter the previous year. Rio is targeting further iron production growth too, aiming for 290 million tonnes per year.

Iron shipments were admittedly up 16% to take care of it, but at 66.7 million tons they were only just ahead of production — back in Q1 2013, production had exceeded shipments by 7%, and the company has been reducing its stockpile.

More new records

The picture is similar at BHP Billiton (LSE: BLT) (NYSE: BBL.US), which reported record iron ore production for the nine months to March, of 147 million tonnes — up a massive 21%. BHP, which gets nearly a third of its annual turnover from iron, also raised its guidance for the year to 217 million tonnes. Again, sales did keep pace with production, so there’s apparently no stockpile building up yet.

The FTSE 100’s third big iron producer, Anglo American (LSE: AAL), while not claiming any new records, did still report a 10% rise in first-quarter iron ore production in April, to 11.3 million tonnes. Sales of iron ore rose overall too, but at 10.8 million tonnes fell short of production.

BHP BillitonPrices in a slump

What about the iron ore price? Well, it’s fallen below $100 per tonne for the first time in two years, at the same time that production is reaching these record levels — and that’s one of the best indicators of an imbalance between supply and demand there is. In fact, each of the three companies here has been driving hard for greater efficiencies and lower costs in order to maintain their profits.

Over the long term, the mining sector is surely a good one in which to invest a little cash — but the signs are that we’re in for a few years of squeezes in the iron ore department.

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Alan does not own any shares mentioned in this article.