Rio Tinto’s H1 2017 Earnings Review: Favorable Pricing Environment Drives Earnings Growth

by Trefis Team
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Rio Tinto
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Rio Tinto reported a sharp improvement in its H1 earnings results, driven by a superior commodity pricing environment and supported by the company’s cost reduction initiatives.

Rio Tinto benefited from higher prices of iron ore, copper, and aluminum in the first half of 2017. The prices of all of these metals were boosted by an improved demand outlook from China post the Chinese government’s announcement of a fiscal stimulus targeting the infrastructure sector. [1] The improved pricing environment offset the impact of lower iron ore shipment volumes as a result of adverse weather conditions in Australia in Q1 and maintenance related activity in Q2. [2] In addition, ongoing operational improvements yielded cost savings which propped up the company’s H1 earnings.

While higher commodity prices propped up the company’s results in the first half of the year, the outlook for the rest of the year remains uncertain, particularly for iron ore prices. While the stimulus was instituted by the Chinese government to counter slowing economic growth, question marks remain over the sustainability of elevated demand conditions from China in the long run. Benchmark iron ore prices stood at $58 per metric ton at the end of June, around a third lower than the peak values achieved in the early part of the year amid mixed cues pertaining to the health of the Chinese economy. [3] Given the uncertainty in the pricing outlook, the company has moderated its growth in iron ore production capacity, as reflected in the muted capital spending outlook for Rio Tinto. [4] We believe Rio Tinto’s management is making the right choice in adopting a cautious approach pertaining to capacity addition amid an uncertain pricing outlook.

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 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. China plans Rmb4.7tn in infrastructure funding, Financial Times []
  2. Second Quarter Operations Review, Rio Tinto Website []
  3. Iron Ore Prices, Y Charts []
  4. Rio Tinto’s H1 2017 Earnings Release, Rio Tinto Website []
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