Did you know the shares of Australia's largest iron ore miner, Rio Tinto Limited (ASX: RIO), have underperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) over the past 1, 5, and 10 years?
That's despite the global production of steel, which is made from iron ore, rising from 851 million tonnes in 2001 to over 1.6 billion tonnes in 2014.
So did Rio Tinto shareholders miss the mining boom? If you didn't sell out in 2008, I'd say the likely answer is yes.
Its underperformance also comes despite China demanding an unprecedented amount of copper, aluminium, and other raw materials, to fuel its infrastructure-led economic boom.
Of course, as a commodities producer, Rio Tinto does not have control over the price at which it sells its products. Meaning, it's dependent on a balance in supply and demand to generate consistent returns for shareholders.
However, after many years of impressive growth, China is now transitioning to a consumer-led economy. This will likely be characterised by slowing demand for metals like iron ore – Rio's most lucrative commodity.
A Chinese slowdown is worse for Rio now than it has been historically, because since 2008 (when commodity prices were riding exceptionally high) the proportion of Rio's sales to China have grown from 18.8% of the group total to over 38%.
Coal, iron ore, and copper are expected to remain in a state of oversupply over the next few years, which is likely to place further pressure on market prices.
Is it time to sell Rio Tinto shares?
On a relative basis, Rio Tinto's shares appear to trade cheap at today's prices, boasting a price-earnings ratio of just 11 and dividend yield of 4.9%.
However, with significant headwinds facing key commodities markets, it has to be asked whether its shares are cheap in absolute terms. Personally, I doubt it.
I think investors should be very careful about using Rio's historical performance to justify future share price targets because commodity prices have almost certainly been inflated by China's unprecedented, infrastructure-led, economic boom.
Buyer beware
