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Rio Tinto and Kazakhmys: The End of the Mining Boom

By Prabhat Sakya - Apr 2, 2013 at 3:05PM

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Rio Tinto and Kazakhmys: the contrarian play that wasn't.

LONDON -- Of my recent contrarian picks, it is worth noting that the only companies that lost substantial money were a couple of commodities companies: Kazakhmys (KAZ) and Vedanta. I have worked out that mining companies are different from other companies.

Because of the highly cyclical, supply and demand led nature of commodity markets, share prices can be extremely volatile. Kazakhmys' price is a quarter of what it was in 2011. Rio Tinto's (RIO 1.91%) (RIO 2.37%) share price is half of what it was a few years ago.

China's construction boom is over
The thing is, in the past decade commodities have experienced their greatest ever boom, as emerging markets -- notably China -- have consumed ever larger quantities of minerals and metals as they have invested in buildings and infrastructure. In particular, prices of iron ore and copper have rocketed outwards.

But it is widely acknowledged that China's construction and infrastructure boom is now over. Instead, its focus is on a technology, consumer and services boom. Thus its demand for metals and minerals has tumbled. Will countries such as India and frontier markets take up the slack? There is an argument to say that they will, but that case is still unproven.

So commodity prices have been falling, and stocks of copper and iron ore have been building. For these reasons, the share prices of Rio Tinto and particularly Kazakhmys have crashed.

The end of the commodities supercycle
How far will share prices fall? I came out of my position in Kazakhmys some time ago. Could there be a contrarian buying opportunity to buy back in? Perhaps. But I now think something bigger is at play here.

Commodities supercycles typically last about 16 years. The current supercycle got under way in the late 1990s, and so is now drawing to a stop.

If I am right and the mining boom really is over, cyclical shares like this really can crash: just think what happened to housing shares after the end of the housing boom. I would avoid mining shares completely.

Foolish final thought
Although there may be falling global demand for metals and minerals, the world is still consuming ever increasing quantities of oil and gas, as the world's population, and thus energy consumption, rises. Small-cap oil and gas shares, although more risky, have the potential to make you a lot of money. So we at the Motley Fool have thought out a guide to finding good oil and gas shares. Please read our FREE report"How to Unearth Great Gas and Oil Shares".

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Stocks Mentioned

Rio Tinto plc Stock Quote
Rio Tinto plc
RIO
$5,449.00 (1.91%) $102.00
Rio Tinto plc Stock Quote
Rio Tinto plc
RIO
$69.54 (2.37%) $1.61
KAZ Minerals PLC Stock Quote
KAZ Minerals PLC
KAZ

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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