After Adding Almost $10 Billion In Revenue In Last 3 Years, Why Is Rio Tinto’s Revenue Set To Slide In 2020?

Rio Tinto (NYSE: RIO) saw its total revenue increase from $33.8 billion in 2016 to $40.5 billion in 2018. The company is expected to end FY 2019 with revenue of $43.8 billion. This would amount to an addition of $10 billion to its top line in the last three years. However, Rio Tinto’s top line growth story is expected to halt in 2020, with its top line likely to shrink by 3.3% to $42.4 billion. The drop in revenue is likely to be driven by a drop in iron ore prices from the recent high achieved in 2019. Additionally, a global primary aluminum price drop due to rising exports of semi-fabricated aluminum from China, is also expected to contribute to lower revenues.

View the Trefis interactive dashboard Rio Tinto Revenue: How Does Rio Tinto Make Money? to understand the historical trend and outlook for each of the operating divisions of the company.

Segment-Wise Revenue Breakup

A] Iron Ore

• Iron ore revenue increased over recent years, from $14.6 billion in 2016 to $18.5 billion in 2018, due to higher production and increased share of volume for the company in Pilbara, in spite of volatility in prices.
• Segment revenue is expected to see a sharp increase to $23.2 billion in 2019, led by a significant rise in global prices due to supply constraints, environmental policy in China, and Vale announcing production cuts at the beginning of 2019, partially offset by lower volume due to operational disruptions.
• However, iron ore revenue could see a slight drop to $21.9 billion in 2020, as prices come down due to a pick-up in supply.
• Global prices have come down from their high of $123 per dry metric ton in mid-2019 (average annual price was around $90 in 2019) to $85 as of February 12, 2020.
• For the full year 2020, we expect price realization to be $77 per dry metric ton, lower than $85 realized in 2019

B] Aluminum

• Aluminum revenue increased from $9.5 billion in 2016 to $12.2 billion in 2018 driven by higher prices due to the commodity’s supply being in deficit globally.
• However, revenue is expected to decrease to $11.5 billion in 2019, due to fall in aluminum prices.
• Though aluminum was in deficit in 2019, this is not reflecting in pricing due to a continuous rise in Chinese aluminum exports, which have led to a decline in global price levels. As increasing number of Chinese steel players are shedding capacity, and demand from automobiles being modest, China has increased its exports of semi products at a lower price, which has, in turn, led to a decline in demand for primary aluminum products worldwide when semi-fabricated products are available at a lower price.
• From its recent high of $2,485 per metric ton in 2018, aluminum prices have dropped to an average of about $1,850 per metric ton in 2019. As of February 12, 2020, aluminum price stood at 1,718/metric ton.
• We expect price to remain subdued throughout 2020 with the metal being in excess supply, leading to segment revenue decreasing to $11.3 billion in 2020.

C] Copper and Diamond

• Segment revenue increased from $4.5 billion in 2016 to $6.5 billion in 2018, with the rise being sharp in 2018, driven by increased copper and gold volumes which were driven by higher grades, productivity improvements, and increased plant throughput.
• However, segment revenue is expected to be lower at about $5.5 billion to $5.6 billion in 2019 and 2020, due to lower volume as RIO has sold its interest in the Indonesian Grasberg mine in December 2018.

D] Energy and Other Minerals

• After increasing to $7.8 billion in 2017, segment revenue dropped sharply to $5.7 billion in 2018, as following the completion of the sale of Rio Tinto’s interests in Kestrel and Hail Creek in August 2018, production of coal attributable to Rio Tinto ceased completely.
• Revenue is expected to remain subdued at $5.7 billion in 2019 and 2020.

Thus, the primary factor leading to a trend reversal and drop in Rio Tinto’s revenue is the decline in iron ore and aluminum prices. As close to 80% of the company’s revenues comes from these two segments, a price reduction is likely to have a magnified effect on the company’s top line.

To understand how Rio Tinto’s revenue trend compares with its major peers such as Vale and Cleveland-Cliffs, view our interactive dashboard analysis.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams