Recent Decline In Iron Ore Prices Weighs On Rio Tinto’s Stock Price

by Trefis Team
-7.91%
Downside
49.12
Market
45.23
Trefis
RIO
Rio Tinto
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Iron ore prices have tumbled in recent weeks as concerns over excess supply have negatively impacted prices of the commodity. The spot prices of Australian ore for delivery to China have declined by nearly one-third to $61 per metric ton over the past two months. [1]

The iron ore rally towards the end of last year and in the beginning of this year was driven by expectations of resurgent demand for the commodity from China, the world’s largest consumer of iron ore, as a result of higher demand for steel. The Chinese government instituted a fiscal stimulus targeting the infrastructure sector last year, which has driven up construction activity and the demand for steel. [2] However, weakening demand-side indicators have raised concerns about supply outstripping demand, with March representing the fourth straight month of slowing growth in house prices in China. [1] More importantly, rising Chinese iron ore inventory levels indicate that the supply of the commodity has outstripped demand. Chinese port inventories of iron ore have risen to 134 million, around a third more than the level in the first half of 2016. [1] As a result, prices of the commodity are likely to remain subdued in the near term.

Given the recent declines in iron ore prices, we have lowered our forecast for Rio Tinto’s realized iron ore prices. Our new forecast represents a decline of around 10% by the end of our forecast period.

In addition, we have also lowered our margin forecast for the company’s iron ore division by 150 basis points by the end of our forecast period.

These changes to our forecast have translated into our new $41.11 price estimate for Rio Tinto.

Have more questions about Rio Tinto? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Rio Tinto
Notes:
  1. Iron ore price tumbles to a near six-month low, Financial Times [] [] []
  2. China Blowing Major Bubbles In 2017, Forbes []
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