How is Rio Tinto Likely To Grow In The Next 2 Years?

Rio Tinto (NYSE: RIO) displayed substantial growth in its revenue in 2017 with the recovery in commodity prices. However, we expect the company’s top line to improve marginally over the next two years as the Chinese demand for the iron ore market is expected to remain dim with the regulatory production curtailments initiated in the country. We expect Rio’s top line to grow at a CAGR of 2% over the next two years. In this note, we look at the factors leading to the company’s marginal growth rate.

China has been strictly curtailing its industrial production and also shutting its illegal plants in order to fight its alarming levels of pollution. As per the latest estimates, the country has already closed about 120 million tons of annual crude steel capacity since its announced plan in 2016. Reduced steel output has negatively impacted the demand for iron ore and is expected to keep the demand environment dim in the near term. China’s steel capacity was estimated at 1.2 billion tons in 2016 and the country aims to reduce this output level to less than 1 billion tons by 2025. Consequently, we expect the company’s iron ore shipment to decline at a CAGR of 2% over the next two years.

However, contrary to the reduced demand for iron ore, prices of higher grade ores are trading at a premium which has remained beneficial for high-grade iron ore producers like Rio. Chinese steel producers are substituting their demand for lower grade iron ore with higher grade ores as they are comparatively less polluting to the environment, and thus allow them to increase their output through lower per unit pollution. Discount for the lower grade iron ore (58% Fe content) in comparison to medium grade iron ore (62% Fe content) has widened from 27% in 2016 to 45% in 2017. We expect this trend to continue in the near term and support the prices that Rio realizes for its iron ore fines.

Additionally, we expect the company’s aluminum division to display some momentum in the upcoming years as the prices for both aluminum and alumina are expected to remain strong with an anticipated supply deficit expected for both the commodities in 2018. Global supply disruptions with the supply cuts at Alunorte, and an enhanced demand environment, is expected to lead aluminum prices to remain strong. This is expected to translate into higher aluminum revenue for Rio even though its shipments are likely to only grow marginally.

Our estimates for Rio’s two years’ projected revenue growth are elaborated in our interactive dashboard. You can make changes to our assumptions to arrive at your own revenue estimate for the company.