Rio Tinto Q3 Production Review: Better than Expected Iron Ore Shipments Boost Share Price

by Trefis Team
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Rio Tinto (NYSE:RIO) has reported its third quarter production data for 2017, slightly beating UBS shipment estimates by 1.2 million tons. The stock price of Rio reached its new 52-week high of $50.77 post the announcement of its production data. Iron ore shipments grew by 6% Y-O-Y with improved rail capacity and performance improvement in the Australian Pilbara iron ore operations. However, copper production plunged 3% Y-O-Y due to lower copper head grades amid an environment of favorable copper prices. [1]

Iron Ore Shipments Remain Strong But Doubts on Sustainability of Iron Ore Prices Prevail  

The company has kept its 2017 iron ore shipment estimate unchanged at 330 million tons. Rio is the world’s second largest iron ore producer and iron ore is significantly used as a raw material in steel production. Rio has access to high grade low cost iron ore which emits less coke for each ton of steel produced. This is an advantage for Rio as the Chinese environmental law becomes more stringent with respect to the level of coke emission into the environment. In anticipation of execution of winter curtailments by the Chinese government, Chinese steel makers have ramped up their current steel production which was reflected in the September iron ore import data for the country. Iron ore imports surged 11% Y-O-Y as per the latest statistics released by the the Chinese customs department. [2]

However, this surge in demand is most likely not sustainable as per the latest outlook released by the World Steel Association. As per their October forecast, China’s steel demand is most likely to stagnate and show no growth for 2018. This is mainly attributable to the fact that China is increasingly concentrated towards cleaning its environment and also preparing to opt out of manufacturing and become a global service economy. [3]

Stagnation in the demand for steel, would in turn, have a hard hit on iron ore imports into the country. This would have an impact on future iron ore prices especially as major iron ore producers aim not to cut back on their production levels.

Although Rio would be in a position to remain profitable in the near term due to its benefit of economies of scale, the company’s iron ore mining margins would continue to remain under pressure.

Plunge in Copper Production May Prove to be Unfavorable 

The company has revised its estimate for 2017 average copper production by lowering output by 10% to 460-480 thousand tons with an explanation of  “delayed ramp up of the Los Colorados Extension project at Escondida and the impact of mine sequencing changes at Rio Tinto Kennecott” from the company. [1] This would prove to be unfavorable for Rio as global copper prices are at their 3-year high amid favorable demand conditions in the Chinese economy (world’s largest copper consumer). The restrictions on the import of scrap copper into China to protect its environment has improved the demand for refined copper, thus boosting global copper prices. [4] Although copper accounts for a mere 10% contribution to the total revenue of Rio, with copper prices at their all-time high, the company could have benefited through increased revenues from this segment.

Thus, with the prevailing production numbers, we eagerly keep a close watch on the company’s developments with respect to its H2 2017 earnings number to get a more clearer picture regarding its revenue numbers.

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. Third quarter operations review, Rio Tinto News Release [] []
  2. Iron ore price soars as Chinese imports reach record high, Mining.com []
  3. China Takes Another Step Towards A Service Economy, Forbes []
  4. Copper price soars to highest since February 2014, Mining.com []
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