Rio Tinto’s Rising Iron Ore Production At Odds With Subdued Pricing Environment

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Rio Tinto (NYSE:RIO) has released its second quarter operations review. The company reported another quarter of robust iron ore production, which is at odds with the prevailing subdued iron ore pricing environment. Rio Tinto’s consolidated iron ore production rose to 80 million tons in Q2, which is around 9% higher as compared to the corresponding period of last year. [1] The continuous ramp-up in production by Rio Tinto, the world’s second largest iron ore producer, and other major iron ore producers, has worsened the slump in iron ore prices, which has negatively impacted the profitability of these companies.

  • Iron ore prices have slumped over the course of last year as a result of weakness in demand and rising supply. Weakness in demand for iron ore by the Chinese steel industry, the world’s largest consumer of iron ore, has dampened the global demand for the commodity. Chinese steel demand is expected to decline by 0.5% in 2015, following on from a 3.3% decline in 2014. [2] Rising production from iron ore majors in the face of weak demand has created an oversupply situation, which has negatively impacted prices. Iron ore spot prices stood at $63 per dry metric ton (dmt) at the end of June, around 33% lower year-over-year. [3]

Iron Ore Prices, Source: Y Charts

 

  • In view of the sharp decline in iron ore prices, Vale, the world’s largest iron ore producer, recently announced production cuts from some of its higher cost iron ore mines. [4] This is the first announcement pertaining to production cuts after several quarters of rapid increases in production.
  • Iron ore majors such as Rio Tinto have been banking upon the displacement of sufficient quantities of high-cost iron ore supply from other producers by low-cost iron ore production from their own mines, resulting in a more favorable demand-supply equation. However, this scenario has failed to materialize so far, with iron ore prices still quite weak. Whereas plans to reduce production by Vale will provide support to iron ore prices, Rio Tinto’s rising iron ore output is at odds with the prevailing iron ore pricing environment.

See our forecasts for Rio Tinto’s iron ore shipments

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Notes:
  1. Rio Tinto’s Q2 2015 Operations Review, Rio Tinto Website []
  2. Short Range Outlook for Apparent Steel Use 2014-2016, World Steel Association []
  3. Iron Ore Spot Prices, Y Charts []
  4. Vale Rallies Most in Month Amid Iron-Ore Supply Cut Plan, Bloomberg []