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Investment Overview for Rio Tinto (NYSE:RIO)
Below are key drivers of Rio Tinto's value that present opportunities for upside or downside to the current Trefis price estimate for Rio Tinto:
Iron Ore Shipments
- Iron Ore Shipments: China currently imports 60% of its iron ore. However, in case China plans to increase its domestic production of iron ore, shipments from international players like Rio Tinto may be hampered. Estimated shipments in 2014 are expected to rise to 275 million tons. In case Chinese iron ore production goes up, this could decline to 220 million tons. Such a decline may lead to a 7% reduction in the Trefis price estimate.
Average realized prices of Iron Ore
- Average realized prices of iron ore: The recent increase in the CIOITTAL (Iron Ore Inventory Total) index and a CNY 30 billion investment from the Chinese government for iron ore has helped increase the supply of iron ore in the market. This may lead to a rapid decline for iron ore in the coming years. This decline however may find support due to the increasing production costs of iron ore. Hence, there is a possibility that prices may decline by only 2-3% annually over the Trefis forecast period. Such a scenario will likely lead to a 6-7% upside in the Trefis price estimate
For additional details, select a driver above or select a division from the interactive Trefis split for Rio Tinto at the top of the page.
Rio Tinto Group is a diversified mining and resources group, headquartered in London and Melbourne. The company has operations across six continents, but mainly focuses its operations in Australia and Canada. The company has a number of subsidiaries, each focusing on one of the 14 different product types in the company's portfolio. The company has a primary focus on mining the primary ore for metals. It also owns a number of large high capacity smelting facilities for aluminum and refining facilities for copper & gold. China's Chinalco owns 9.3% of Rio Tinto.
The company's Iron Ore division is the most valuable division for the following reasons:
The iron ore segment accounts for approximately 33-38% of the company's revenues. Moreover it is expected to remain in this range for the next few years. More than 60% of the company's profits come from the Iron Ore division. Although this number may decline over the next four years, the division will still contribute close to 50% of the company's profits. The company has long term contracts with iron and steel manufacturers worldwide, safeguarding its production and mining activities.
Increasing demand from the developing markets
Iron ore is the principal raw material in the production of steel. The global steel production industry has grown substantially in the last decade on the back of the rapidly growing infrastructure needs of developing countries in primarily China and India. This growth is expected to continue and will lead to an increase in the demand for iron ore and coal in the years to come.
Increasing demand of copper in developing countries
A number of manufacturing units are being set up in developing countries like India, Thailand, China and South Korea primarily due to lower labor costs in these countries. Due to rapid economic growth in emerging countries, the demand for copper had increased sharply over the last few years.The global economic growth has, however, slowed down and this has resulted in a dip in copper demand. Going forward,once the economy recovers, demand is expected to pick up. This would benefit the copper industry in terms of revenues and margins but may not impact prices because of the surplus supply expected in the market.
Imminent oversupply of iron ore
The ramping up of iron ore production by major iron ore producers worldwide and the expected focus on increasing iron ore self-sufficiency by China(the world’s largest consumer of iron ore) will most likely lead to an iron ore oversupply in the global market. This oversupply predicted in 2012 will lead to a considerable fall in global iron ore prices eventually. We are already witnessing it happening at the moment.
China's impact on global coal prices
China currently consumes half of the global production of coal, and its demand for coal is only expected to increase in the near future. To further aggravate this situation, the Chinese government intends to limit the amount of coal that is produced in the country to ensure that the reserves are not depleted very quickly. These factors would significantly raise global coal prices in the years to come.
Aluminum as a replacement for other materials and metals
- Aluminum is the most recycled product in the world. Around 75% of the aluminum products since 1888 are still in use. Aluminum cans are the world's most recycled product with around 90% of it being recycled in some countries.
- Aluminum is lightweight and the use of it in cars can help reduce weight and thus emissions. Replacing 1kg of heavier metals with aluminum in a car or light truck can save a net 20 kg of CO2 over the life of the vehicle.
- Aluminum is durable and requires lower maintenance (corrosion resistant) compared to other metals and is hence finding its applications in the construction industry.
- The unique characteristics of aluminum such as malleability and ductility help in the fabrication, storage and distribution of retail products. It is thus being widely used in the packaging industry as well.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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