So far in 2015:
- The BHP Billiton Limited (ASX: BHP) share price is down 39%;
- The Rio Tinto Limited (ASX: RIO) share price is down 23%;
- The Woodside Petroleum Limited (ASX: WPL) share price is down 25%; and
- The WHITEHAVEN COAL LIMITED (ASX: WHC) share price is down 51%
What's going on?
The effects of mining booms and busts have crippled investors' pockets for centuries — if not longer. Their legacies can be found in the form of rusted mills and machinery, dangerous mine shafts and environmental decay the world over.
But despite more historical reference points than we care to acknowledge, investors continue to fall foul to the vicissitudes of mining.
Indeed, all the data feeds, market pricing and general news flow proved to do little for the investors who watched on as the share prices of BHP, Rio and their peers fell by the wayside in 2015.
Now, investing isn't rocket science. In fact, much of the time it's far simpler than you first realise.
For example, budding mining and resources investors need only try to understand where we sit in the mining cycle to put the odds of making money significantly in their favour. Between 2011 and 2014, the market prices of key commodities like iron ore, copper and oil reached unsustainable highs, fuelled by China's seemingly insatiable demand.
It was never going to end well for investors who played 'the greater fool' theory by buying mining shares at the time.
But although I think it could get even worse from here, the fact is no-one knows where prices will head in 2016 and beyond. Indeed, the quantum of the China-fuelled commodities boom, which started in the early 90's, was unprecedented, so it's anyone's guess when the ripple effect of its inevitable bust will subside.
Nonetheless, looking ahead into 2016, it appears bullish pundits think iron ore, copper, oil and coal prices will stabilise. That's the optimistic case. The worst case, mind you, is that commodity prices keep plummeting.
1 reason it may be time to sell BHP and Rio
Trying to predict future commodity prices is a risky pastime and any forecast will invariably end up being wrong. Therefore, in my opinion, investors should just ignore mining shares altogether.
With no product differentiation (i.e. your iron ore is the same as my iron ore), even the most dominant producers do not have the ability to set market prices for their products.
For the biggest and best producers, the price taking aspect makes profits vulnerable to the market's ebbs and flows; however, during the busts, it's fatal to almost every other company that isn't among the low-cost producers.
For that reason, I think Rio and BHP shares are a 'sell' leading into 2016.
