ASX mining shares were some of the standout performers over what was a tough year in 2022. While the S&P/ASX 200 Index (ASX: XJO) went backwards by 5.5% last year, many ASX mining shares smashed that loss.
Take the BHP Group Ltd (ASX: BHP) share price. BHP is the largest mining company on the ASX. BHP shares rose by a healthy 9.95% last year. Add on BHP's impressive dividends in 2022, and we get a return that could be double that (depending on what price you bought the shares for).
It wasn't just BHP though. Fortescue Metals Group Limited (ASX: FMG) shares rose by more than 6.7%, which were also juiced up by monster dividends.
Rio Tinto Limited (ASX: RIO) shares were up more than 16% as well, while coal miner Whitehaven Coal Ltd (ASX: WHC), while technically an ASX 200 energy share, rocketed an extraordinary 185%.
As such, it was a fantastic year to own most ASX mining shares in 2022.
But that doesn't mean it's automatically a good idea to keep owning these companies in 2023. So today, let's discuss whether or not we should be buying ASX mining shares.
The problem with miners
Mining shares are a rather unique beat in the investing world. Most companies have a lot of control when it comes to what they sell their goods and services for. For example, if Woolworths Group Ltd (ASX: WOW) wanted to boost its profits, it could quite easily boost its supermarket prices almost instantly.
But miners don't run that way. They are forced to accept whatever price the international market sets their chosen commodity at. If iron ore is going for US$100 per tonne, BHP can't go to a buyer and tell them they are charging US$150 per tonne.
The only control miners generally have over their products is how much it costs them to extract said products.
As such, miners are hostages to the whims of the global commodity markets.
This can be great at times, of course. Miners had such a strong 2022 because commodity prices surged last year.
Wars, inflation and supply chain bottlenecks all combined to push up oil, iron ore, copper, gas and coal to very expensive levels. That's why some of these companies were making money hand over fist in 2022.
But what of 2023?
Is 2023 the year to buy ASX mining shares?
Well, my philosophy when it comes to miners is very simple. They are inherently cyclical businesses. Therefore, they will not steadily compound your wealth the same way a well-run company in another sector might.
So it only really makes sense to buy a miner at the bottom of a commodity cycle. In 2021, iron ore was at record highs of over US$200 per tonne. But the price has come down significantly. As of today, this base metal is asking just over US$123 per tonne.
But this is certainly not even close to the lower bounds iron ore has plummeted in the past. In 2016, for example, iron ore was under US$50 a tonne.
Iron ore could well bounce back to above US$200 a tonne in 2023. But it could also go back to below US$50. I have no idea which way it's going to go, nor do most investors.
As such, I see investing in miners now as not being too different to deciding between red or black at the roulette table. I'm an investor, not a gambler. So I'll be staying away from miners in 2023 until I'm reasonably confident a commodity only has one way to go – up.
