Iron-Ore Oversupply Could Impact Rio Tinto
The average iron-ore price realized by Rio Tinto (NYSE:RIO) has increased historically through 2008 driven by Chinese demand for iron ore and a continuous rise of international sea freight but declined in 2009 due to the economic crisis. Backed by strong global demand post-crisis, Rio’s average iron-ore price increased to $101 per ton in 2010. We expect the average price will continue increasing through 2012 and then decline due to a probable oversupply scenario of iron-ore, which will likely result in declining price for Rio Tinto as well as competitors like BHP Billiton (NYSE:BHP), Vale (NYSE:VALE), and Cliffs Natural Resources (NYSE: CLF).
Rio is putting tremendous effort into capitalizing on the vast demand for iron-ore globally. The company recently said in a press statement that it’s accelerating its iron ore expansion program in the Pilbara region of Western Australia with US$676 million funding. [1] Rio also entered into a joint venture with Chinalco – China’s state owned mining major, to explore mainland China for mineral deposits. (See Rio Tinto and Chinalco JV to Explore China)
While we estimate Rio Tinto’s average realized price for iron-ore will decline to $88.70 by the end of our forecast period, Trefis members expect the average iron-ore price will see a smaller decline leading to $103 – implying an upside of 5% to our RIO stock price estimate.
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We have a Trefis price estimate of $97 for Rio Tinto’s stock, implying a premium of over 40% to the current market price.
Strong Global Demand for Iron-Ore…
The emerging economies of Asia have shown promising growth rates in the recent years. China currently imports nearly 60% of its iron ore requirements. As countries such as China and India continue to invest in infrastructure development, the demand of steel and iron ore will continue to rise.
Economies of developed countries are recovering as well. According to a PWC report, the mining companies in Canada’s British Columbia have registered strong revenues, net income and cash flows during 2010, driven by strong coal and metals prices. The report stated that the industry’s aggregate pre-tax net earnings were $3.7 billion in 2010, up by 65% from $2.3 billion in 2009. [2] Reconstruction of the earthquake-hit Japan will also require heavy investments in copper and iron-ore, which will keep iron-ore prices elevated.
…. But Oversupply Scenario Possible
China, the world’s largest producer and importer of iron ore, has been busy building iron-ore inventories over the past few years on the speculation of a continuous uptick in iron-ore demand from steel manufacturers. This already suggests an overcapacity in the industry. According to a report by China Mining Federation, as of May 27, 2011, iron ore inventory stocked at 32 Chinese ports totaled around 91.4 million tons, up 2.10 million tons over one week earlier. [3] We expect that an oversupply of iron-ore is likely to push prices down from 2012 till the end of our forecast period.
Our complete analysis of Rio Tinto’s stock
Notes:- Rio Tinto accelerates Pilbara iron ore expansion, Company Press Release, June 15, 2011 [↩]
- BC mining companies are riding the wave of strong demand and high commodities prices, PWC, May 10, 2011 [↩]
- Brief on Iron-Ore Inventory, June 2, 2011 [↩]