It looks – so far at least – like we've seen the best of the mining boom, for investors at least. Prices have tailed off, miners are shelving or scaling back expansion, and Chinese demand looks to be moderating.
Granted, growth well in excess of 5 per cent can only be considered moderate in China, but it's the reduction in the rate of growth that tells the story – and that is having reverberations around the world.
Let's take a step back and look at the mining boom that was.
Yearning for the good old days
China's modern economy is nothing short of a miracle in almost any historical context. Its economy has gone from a largely agrarian subsistence one to a modern industrial giant in a matter of decades.
China has quickly become the world's factory – feeding the seemingly endless consumer frenzy particularly for new electronic gadgets. Of course, if China is the world's factory, Australia is, in large part, its quarry. While China throws up new cities and builds millions of iPhones, much of the raw material to feed that binge is being dug up in Australia.
So far so good, and the result is the mining boom we've been enjoying.
When something appears too good to be true …
In our excitement about the growth of our mining industry, many people – investors included – seemed to miss two key risks – that one day the growth in Chinese demand would slow, and that until that point, existing and new miners would be digging new mines as fast as they could to capitalise on the boom.
Yes, the volume of resources demanded by China continues to grow – and that trend shows no real signs of changing any time soon. But, like concert tickets and fine art, scarcity pushed up iron ore prices (in particular) when the aggregate global demand exceeded the available supply.
For the last few years, it truly was a seller's market, with miners being able to sell to the highest bidder. Like an Australian home auction on a nice spring day, there were plenty of bidders, and life for the sellers was good.
… Then it probably is
Then, as Chinese demand slowed, and global mining production grew, we seem to have passed a tipping point. The resources industry may well have reverted to type – a business where supply meets or exceeds demand, and any pricing power among the miners dissipated.
That doesn't mean volumes will decline any time soon – far from it. However, it does mean that the unusually high profits per tonne of iron ore may well be a thing of the past.
A miner selling iron ore at $150 a tonne might have been banking a profit of $60 or $70 with each tonne sold. With the price back down closer to $100 per tonne recently, that margin might have shrunk by up to 70 or 80 per cent.
You have to sell a whole lot more iron to make that margin back.
Time to pay the piper
If the mining boom is over, the miners themselves face a much less profitable future. We'll likely see consolidation among the smaller miners (or the big boys go shopping among the smaller end of town), and we may not have seen the last iron ore player go broke. If you think shrinking profit margins are bad, you should see what happens when you combine them with excessive debt.
Mining services companies have also had the luxury of being in a seller's market too. Miners needed more equipment, more expertise and more holes dug – and supply of that type of capability wasn't growing at the same speed as demand.
Like the miners themselves, though, the mining services industry might find itself all dressed up with nowhere to go. You can name your price when you have your pick of the projects, but when the worm turns, profit margins come under severe pressure. We've seen that happen in the infrastructure and construction sector – with severe consequences.
The race is now on between the mining slowdown and broader economic growth. It's likely a significant part of the reason Glenn Stevens and the RBA board decided to cut rates last month – to make sure they've stoked the fire enough to withstand some of the collateral damage should iron ore prices not recover.
It's tempting for investors to jump on "beaten down" stocks – to ask the rhetorical question "How much further can it fall?" As a wise man once told me, no matter how far a company's share price has fallen, it can still go to zero.
Mining – and mining services – may well recover from here. In hindsight, some of those companies may be screaming bargains today. Or not. I don't know how investors in these sectors can comfort themselves that there are better times ahead. It's possible, but if you're wrong, it'll be devilishly hard to make back your losses.
Warren Buffett's first rule – “Don't lose money” – is the top of the list for a reason … you don't want to have to go back to square one.
Are you looking for attractive dividend stock ideas? BusinessDay readers can click here to request a new free report titled Secure Your Future with 3 Rock-Solid Dividend Stocks.
Scott Phillips is a Motley Fool investment analyst. You can follow Scott on Twitter @TMFGilla. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).