Will It Really Take Antofagasta plc & Rio Tinto plc 20 Years To Recover?

I have been bearish on the mining sector for several years, and despite recent talk of an emerging markets revival I remain negative. But I look like a raging bull compared to Harry Nimmo, respected fund manager at Standard Life. He reckons we shouldn’t expect a recovery for, wait for it… 20 years!

Nimmo says historical data suggests a multi-decade downturn for commodities. He noted that there have been four super-cycles in metals prices over the last 300 years: “The first was associated with the British industrial revolutions around 1830, then the rise of America as an industrial power in the late 19th century, then the reconstruction boom in the post-war era from 1945 to the mid-1960s and finally the rise of China in the last 20 years.”

With the Chinese super-cycle thoroughly played out, Nimmo reckons we can forget about the mining industry for two decades. Which is dismal news for Footsie-listed mining giants such as Antofagasta (LSE: ANTO) or Rio Tinto (LSE: RIO).

Farewell, China

Both certainly look played-out today. Antofagasta is down 65% over the past five years, Rio Tinto is down 46% over the same period, which actually makes it one of the best performing big miners. Numbers like these will always attract contrarians but if Nimmo is right, now is too early to dive in. Two decades too early.

My concern about mining is that the sector has taken too long to wake up to the scale of the challenge ahead of it. FTSE big boys BHP Billiton and Rio Tinto have responded by ramping up production in a bid to grab market share and drive out high-cost competitors, with the inevitable impact on supply and price. The unspoken assumption is that China will be start gobbling up metals and minerals once its economy starts recovering, but I don’t think that will be the case, as the country switches from infrastructure to consumption. China’s super growth spurt is over, and may never return. 

Antofagasta’s Anguish

Chilean-focused miner Antofagasta will be punished for its focus on copper, a king without a crown now that markets question whether it can still be treated as a leading economic indicator. China has accounted for 50% of global demand but that is set to plunge. At around $4,666 a tonne the price is at a six-year-low and Goldman Sachs forecasts it will fall to $4,500 a ton by the end of next year. Antofagasta’s balance sheet may cope with a year or two of low prices, but 20 years is another matter.

Rio Tinto currently yields more than 6% which looks the best reason to buy the troubled stock right now, but the dividend certainly can’t withstand a long downturn in commodity prices. With earnings per share forecast to drop 48% this year and 12% in 2016, there is clearly plenty of pain to come. You may be enjoying Rio’s dividend today but it won’t stay at 6% for the next two decades, unless Nimmo is wrong.

You might want to hang around until 2035 waiting for the next great commodity super cycle, but there are plenty of FTSE 100 stocks that promise earlier rewards.

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Harvey Jones 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.