The shares of Rio Tinto (NYSE: RIO) observed a 20% contraction in value since May, after observing a rally in early 2022, primarily due to renewed restriction measures in China – raising concerns of a broad-based demand crunch in the coming years. However, EIA’s lower benchmark oil projections for 2023 and prospects of leniency in China’s Zero-Covid policy after Shanghai’s announcement to end lockdowns, are key positive indicators. Thus, improvement in China’s industrial output is likely to assist beaten down commodity prices as durable goods production rates rise. Moreover, investments in the renewable energy sector including electric vehicles, charging infrastructure, and solar & wind power plants are key markers supporting long-term demand for iron, aluminum, and copper. Our interactive dashboard on Rio Tinto’s valuation highlights the historical trends in revenues, earnings, valuation multiple, and forecast for FY2022.
Iron & Aluminum demand to grow in 2022 and 2023
In 2021, RioTinto reported 276 million tons of iron ore and 54 million tons of bauxite production. Despite multiple waves of the pandemic, the company’s iron ore production surged by 60% (y-o-y) assisted by rising demand. Given iron, aluminum, and copper’s diverse utility across multiple industries and an upward commodity price cycle, the company is likely to observe sizable cash flow growth in 2022. Per IMF, the global output is likely to increase by 3.6% in 2022 and 2023 with China & India as focal points. Thus, iron, aluminum, and copper demand are likely to remain strong despite the concerns of high inflation in developed and developing economies.
Aluminum and copper prices to retain strength
Per World Bank’s commodity market outlook, copper and aluminum prices are expected to be more than $4/lb and $3000/mt until 2024. Currently, the copper futures price for contracts expiring in December 2023 is above $4.20/lb, and the aluminum futures price is above $2,300/mt – comparable to RioTinto’s average realized price in 2021. Low inventories, strong durable goods demand, and high energy prices are key factors assisting the commodity price cycle in recent times. (related: Are Tides Turning For Newmont Corporation Stock?)
|S&P 500 Return||0%||-14%||84%|
|Trefis Multi-Strategy Portfolio||2%||-18%||223%|
 Month-to-date and year-to-date as of 6/7/2022
 Cumulative total returns since the end of 2016