MENU

Why the Rio Tinto Limited share price may continue to fall

Credit: Cesar Nguyễn

The Rio Tinto Limited (ASX: RIO) share price continued to fall today.

Down 2% before midday, shares of Australia’s largest iron ore miner by volume have crumbled 20.5% in six months.

Although they have fared better than rival BHP Billiton Limited (ASX: BHP), which is down 35%; the Rio Tinto share price has been at the mercy of steep falls in major commodity prices like iron ore, copper and coal.

The price of Australian thermal coal has fallen 18% in 12 months, copper is down 22%, while iron ore is 34% weaker. Together, these three commodities generated more than 60% of Rio Tinto’s 2014 revenue – the iron ore division accounted for over 90% of profit.

Unfortunately, the market price of major raw materials is mostly a function of China’s demand, and that demand is primarily driven by infrastructure projects, such as property development, roads and railways.

China’s demand is expected to plateau, as the country’s enormous middle-class population shifts towards consumption (i.e. away from infrastructure-led investment) and the other problem for Rio can be found on the supply side of the market.

Supply from the world’s major producers of seaborne iron ore is expected to grow in the next few years. That’ll place more downward pressure on prices and continue to crimp Rio’s profit margins, in my opinion.

Buy, Hold or Sell?

While Rio Tinto’s share price looks cheap at today’s levels, I think it – along with BHP – is best avoided. According to my basic valuation models, Rio Tinto and BHP shares are worth less than their current — seemingly discounted — prices. Remember: If you are not sure of their profit outlooks or valuations, you’re not required to buy them.

Indeed, there are plenty of better dividend stocks on the market today…

NEW REPORT!

Forget BHP and RIO. These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

Motley Fool contributor Owen Raszkiewicz has no position in any stocks mentioned.

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.