Earlier this week, at a family dinner, I asked a senior executive how his company was performing. His company supplies sophisticated equipment, costing many millions of dollars, to resource companies around the world.
He replied with something to the effect of, "It's incredible how little work is out there". After a recent visit, he said oversupply in China is "crazy".
Of course, this should be nothing new to regular readers of fool.com.au. We've said it for years: the resources sector is in for a tough time.
Why? Because China is coming down from the greatest infrastructure-led economic boom of all time.
The markets affected by the slowdown will take a lot longer to recover than many people expect. We've already seen commodity prices plunging, but the prices of iron ore, copper and everything in between could still head lower from here.
There are renewed signs infrastructure growth in China, especially housing construction, could be nearing its end. No one really knows for sure – not even official statisticians – but estimates suggest the amount of vacant houses in China is equivalent to six Manhattans. And that's only the ones we know about.
We estimated last year, there were enough empty apartments to house six years' worth of housing migration (from country to city) – equivalent to an entire year of GLOBAL iron ore production. While a 'buffer' on housing construction is normal in China, a slowing economy may mean something has to give.
From the outside, it appears the demand for raw building materials will likely go lower as the Chinese economy transitions. Since it accounts for 66% of world seaborne iron ore demand, China's slowdown puts the profits of producers like Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and BHP Billiton Limited (ASX: BHP) at significant risk.
Unfortunately, on the supply side, we have producers ramping up production levels of key commodities in order to lower their costs and keep revenues somewhat intact.
Finally, to put China's boom in perspective, it consumed more cement between 2011 and 2013 (three years) than the USA did during the entire twentieth century! But don't worry, in 2014, China had only $28.4 trillion of debt.
Foolish takeaway
The bottom line is any company dependent on supplying commodities into China could be in for a tough five or so years. Moreover, if BHP and Rio shares produced negative total shareholder returns (dividends plus capital gains) over the past five years (boom time for commodities), what reason does any prudent investor have to warrant owning their shares? Owning a low-cost index fund or ETF would be a far more profitable and easier way to invest your money.
Buyer beware.
