Premium mining companies such as Rio Tinto plc RIO are currently in hot waters, as iron ore prices continue to slide over time, primarily due to increased productivity and unhealthy industry rivalry.

Iron Ore Price Trend

Growth of modern economies is always pioneered by an adequate supply of iron ore. It is the principal source of iron used across the global steel and iron industries. At present, iron ore is mined in approximately 50 counties; Brazil and Australia being 2 major mining hubs.  

According to the survey conducted by the United States Geological Survey (“USGS”), global iron ore production was 3,220 million metric tons (mmt) at 2014-end, up 3.5% year over year. In Jan 2015, iron ore output in the U.S. was 6,640 thousand metric tones (tmt) which increased to 14,700 tmt at the end of Mar 2015.

Increasing productivity and supply of iron ore are ultimately lowering its market price with time. According to media reports, as of Dec 31, 2012, iron ore was priced at $128.51 per dry metric ton (dmt), while its spot price decreased to $60 per dmt as on May 31, 2015. Moreover, as forecasted by few media reports, iron ore prices are anticipated to go down further to $45 per dmt in the second half of 2015, and would continue to trend below $50 dmt in 2016.

Apart from increased productivity, economic downturn in China is also responsible for the fall in iron ore price. Sluggish Chinese economy has lowered iron ore imports and even reduced the credit facilities offered to the steel companies. Lower demand, in a market with increased supply, has dragged the market prices of iron ore. At the same time, we believe severe rivalry between mining giants such as Rio Tinto and BHP Billiton Limited BHP played a role in the recent decline of iron ore price.

Price Effect on Rio Tinto

Iron ore is a major mining product offered by Rio Tinto. The company remains focused on augmenting its iron ore production, so as to satisfy the growing market demand and thereby, increase revenues in the long run.

However, a decline in iron ore price is triggering certain short-term negatives for the company, as fall in price of its major product would lower revenues and weigh on its margins. This is also weakening investors’ confidence in the stock, as evident from the company’s share price of $41.04 on Jul 2, 2015, down 23.5% from the year-ago tally. Moreover, the stock fell nearly 8% year to date.
 
Other Stocks in Fray

We anticipate that declining iron ore prices will hurt the commercial affairs of other mining companies too, such as BHP Billiton BHP, Vale S.A. VALE and Platinum Group Metals Ltd. PLG.

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