In the last month the share price of mining giant Rio Tinto Limited (ASX: RIO) has sunk almost 7% as investors head for the exits over concerns that an increasing iron ore supply will put pressure on prices. So far it would appear as though these investors have made the right decision.
According to The Metal Bulletin iron ore prices slipped to a two-month low of US$55.30 a tonne overnight, much to the dismay of Rio Tinto, BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG), and of course the Australian federal government which has based its budget on an iron ore price of US$55 a tonne.
Despite this Rio Tinto's CEO Jean-Sebastien Jacques is not concerned. In fact, Mr Jacques is cautiously optimistic that things will improve and believes that the long-term outlook for commodities demand is looking much brighter now.
Although he sees short-term volatility remaining, in an interview with Bloomberg Mr Jacques stated that recent data out of China was pointing to a lift in the construction market. As a result he expects commodities demand to pick up, with copper prices first in line for a resurgence.
So is now a good time to invest in Rio Tinto? Whilst it is true that recent data out of China has been very positive. I would personally hold off an investment in the miner at least in the short term.
Iron ore is the miner's biggest contributor to revenue, accounting for around 42% of total revenue. With supply increasing from both Australia and Brazil, I expect the the iron ore price will continue to be negatively impacted in the short term. This is likely to put sustained pressure on Rio Tinto's share price, potentially driving it lower over the next few months.
In the long-term things may admittedly improve. Whilst I would still prefer to invest in other areas of the market, if iron ore and other base metals see a sharp rise in prices I can certainly understand the appeal in investing in Rio Tinto.
