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Falling commodity prices make for elusive profits

After write downs and job layoffs, Vale (NYSE: VALE), a Brazilian resources behemoth, is now selling its Degulla mine in the Galilee Basin in Queensland, making it the third coal asset it’s put on the chopping block.

This follows massive jobs cuts announced last week by other mining heavyweights like Peabody Energy (NYSE: BTU), Glencore Xstrata and mining services company Downer EDI (ASX: DOW), which totalled over 1,000 job cuts in just one week.

Some of Australia’s biggest producers have struggled to turn profits thanks to falling commodity prices in coal, iron ore and gold. In the past 12 months this has been reflected in share prices of many of the ‘pure play’ commodity stocks like Yancoal Australia (ASX: YAL), Fortescue (ASX: FMG) and Newcrest Mining (ASX: NCM), with each falling more than 37%.

In recent months, many companies in the resource sector have come under pressure to sell off assets and cut costs. The reactive nature of their management has raised questions about their ability to predict costs and make profit forecasts. However, the cuts may be coming just at the right time.

With commodity prices such as iron ore tipped to trend even lower in the next three years, the write downs and asset sales could be just the beginning.

Foolish takeaway

Investors would be wise not to fall into value traps that are arising in the resource sector. Investors’ expectations will play a huge part in driving these share prices downwards and it may seem as though the market has got it all wrong. However, the efficient market hypothesis states that any information released about a stock will be realised immediately and although you may be able to gain a couple of percent here or there, wouldn’t you rather buy some great stocks that you can hold forever?

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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