The Rio Tinto Ltd (ASX: RIO) share price had a challenging time in 2024, falling by 14%, as the chart below shows. That compares to a 7.5% rise for the S&P/ASX 200 Index (ASX: XJO), meaning the iron ore mining giant underperformed by more than 21%.
A decline in the ASX mining share shouldn't surprise us because commodity businesses are typically cyclical. They regularly experience ups and downs.
There are two key factors that affected the Rio Tinto share price last year, in my view. Let's take a look at what happened.
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Financial performance
The latest result Rio Tinto reported was its FY24 half-year financials in August. Investors typically pay close attention to a business's profit, so the reported figures are influential.
The numbers weren't bad, with the six months to 30 June 2024 compared to the six months to 30 June 2023 showing growth in various financial metrics.
Rio Tinto advised that revenue increased 1%, operating cash flow rose 1%, underlying operating profit (EBITDA) grew 3%, and net profit after tax (NPAT) increased 14%. The one significant negative was a 25% decline in free cash flow after a 34% increase in spending on assets such as property, plant, equipment and intangible assets.
The US$5.8 billion of net profit generated allowed the miner to pay owners of Rio Tinto shares a dividend of US$1.77 per share.
Why did the Rio Tinto share price suffer if HY24 was solid? I'd put it down to a decline in the iron ore price.
Weakness for iron ore hits Rio Tinto shares
Mining costs don't typically change much over the course of a month or even a year. So, a rise in the iron ore price unlocks more revenue for the same volume of production and that largely flows onto the net profit line of the financials.
However, the reverse is true when the iron ore price drops. The decline in revenue significantly affects net profit.
The movements of the iron ore price change how much profit investors think the ASX mining share can make for the foreseeable future. A noticeable decline in the commodity price can prompt investors to lower the valuation of Rio Tinto shares, which seems to have happened.
According to Trading Economics, the iron ore price was above US$140 per tonne at the start of 2024 and finished the year at close to US$100 per tonne. Rio Tinto's ability to make a good profit significantly reduced over the course of the year.
What caused the iron ore decline? As we regularly reported throughout the last 12 months, the answer appears to be weakness in the Chinese economy. Chinese construction activity has been weak, and investors have not been impressed by the stimulus package that China announced.
China said it would be proactive with its fiscal policy and moderately looser monetary policy, which includes increasing the deficit, issuing more ultra-long-term bonds and lowering interest rates.
The broker UBS also recently noted in a note that incoming US president Donald Trump's proposed tariffs could hurt China and the global economy:
The outlook for commodities has deteriorated since November (and major commodities have all retraced) on concerns that Trump's proposed tariffs will drive lower global growth and a stronger US dollar.
China's stimulus has/will continue to underwhelm in our view and there is significant uncertainty on the impact of the tariffs and magnitude of China stimulus going into 2025. As a result, we think it is too early to turn positive on all industrial commodities.
As a bonus, I'll highlight one additional development during 2024 for Rio Tinto.
Lithium investment
Rio Tinto announced two significant investments at the end of last year with a focus on lithium.
In December, the ASX mining share announced it's going to invest US$2.5 billion to expand its Rincon lithium project capacity to 60,000 tonnes per year.
In October, the miner signed a multi-billion dollar takeover of Arcadium Lithium (ASX: LTM).
Owners of Rio Tinto shares are seeing their company take major bets on lithium, so time will tell how much this pays off for the miner.
