Why Rio Tinto Has More Downside to Offer

Iron ore miners have struggled massively over the last few years. I have recommended selling top iron-ore miners like Vale (VALE), Cliffs Natural Resources (CLF) and Rio Tinto (RIO) in the last 12 months to 18 months. While both Vale and Cliffs Natural Resources have lost considerable value in the reference period, Rio Tinto has performed better comparatively. Rio Tinto is down “only” about 30% since the start of 2014, but I think the stock has more downside to offer, which makes it a good short candidate.

Falling Iron Ore Prices

Iron ore prices currently slumped to seven-year lows as Financial Times reported that prices of for China delivery fell to $43.4/ metric ton.

Iron ore prices may have fallen to multi-year lows, but investors shouldn’t expect things to get better going forward. The demand-supply scenario hasn’t changed as in getting worse by the day, which rules out a recovery for top iron ore producers. I have already recommended shorting Vale and Cliffs Natural Resources multiple times in the recent past. Hence, in this article I have decided to focus on Rio Tinto.

Like oil, iron ore prices have crashed because of the top miners increasing production across the world. Iron ore prices are expected to stay pressured as demand from China will continue to be weak. To make matters worse, the production is expected to increase. For instance, Vale’s S11D mine, which is expected to become functional next year, will pour in millions of tons of iron ore into the currently over supplied  market.

This is why analysts are expecting iron ore prices to slump further. Commodities specialist Andy Xie predicts iron ore prices will fall below $40 before year-end, and could sink as low as $30 for much of next year. Iron ore miners have failed to tackle the lack of demand from China and shot themselves on the foot by increasing production.

Conclusion

Due to the reasons mentioned above, the iron ore demand-supply scenario isn’t expected to change in the near future. Given the expected increase in production from multiple sources, it’s highly likely that iron ore price will fall going forward. In addition, the lack in demand from China will further put downward pressure on iron ore prices.

Considering the headwinds, I think Rio Tinto will also suffer. The stock has managed to outperform its peers, but the stock hasn’t bottomed yet. With iron ore prices still falling, Rio Tinto’s dividend yield is unsustainable and the stock will eventually follow the same path as its peers. Hence, I think Rio Tinto is a good short candidate.

Published on Nov 30, 2015
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

Posted in ...