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Will Rio Tinto plc And BHP Billiton plc Ever Return To Their 2011 Highs?

Back in 2011, the sky was the limit for Rio Tinto (LSE: RIO) and BHP Billiton (LSE: BLT). China’s insatiable demand for raw materials had pushed commodity prices to multi-decade highs, profits hit record levels and rock-bottom interest rates gave the miners easy access to the capital required to finance their mega-projects. 

Four years on and a lot has changed. Commodity prices have fallen back to lows not seen for 13 years, mining industry profits have collapsed, and it looks as if China’s demand for raw materials is finally starting to slow. 

High and dry 

After years of aggressive expansion, Rio and BHP have now been left high and dry. Both companies have been forced to write-off billions of dollars of investments made during the boom years and glory projects, such as BHP’s $20bn shale oil bet, are struggling to get off the ground. 

Investors have turned their backs on Rio and BHP as it has become increasingly clear that low commodity prices are here to stay. Since the beginning of 2011, BHP and Rio’s shares have declined 58% and 51% respectively excluding dividends. It should come as no surprise that over the same period, the Bloomberg Commodity Index, which tracks a basket of 22 major commodities, has fallen by 50%. 

But the real question is, how long will this downturn last? Unfortunately, looking at historic data it could take decades for commodity prices to return to the levels seen during 2011. 

Data trends

Every year, analysts at Deutsche Bank put out a Long-Term Asset Return Study, which looks at market returns and asset prices over two centuries. The data in this study shows that the price of many commodities has been on a constant downward trend since the 1800s. The recent boom drove commodity prices to historically high levels. Many prices have now corrected, although it’s hard to say that commodity prices are cheap relative to long-term trends. 

And with this being the case, it is highly improbable that commodity prices will return to the levels seen during 2011. If historical trends are anything to go by, it’s likely prices will fall further before recovering. 

Profits falling 

BHP and Rio’s earnings per share are expected to fall by 40% and 50% respectively this year and since 2011 the two companies have seen profits slump by more than 66%. For earnings per share to return to the level reported for 2011, BHP’s pre-tax profit would have to increase by a staggering 330%. While Rio’s management would have to find some way of tripling pre-tax profit. 

As commodity prices resume their multi-century downward trend, it’s unlikely that either company will be able to achieve such a mind-blowing increases in profit. 

The bottom line 

BHP and Rio’s performance is tied to commodity prices and with commodity prices set to fall further, there could be further pain ahead for these two miners. 

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Rupert Hargreaves 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.