Rio Tinto's Earnings Challenged by China Steel Demand

The world's second-largest iron ore producer is expected to update its outlook after the CEO warned that Chinese steel demand was nearly peaking.

Some Information is Already Out There

Rio Tinto's shares have been underperforming this year as the world's largest consumer of its primary product, iron ore exported to China, has not seen economic growth match expectations. To help remedy this, the company has been working on developing what could be the world's largest untapped iron ore resource at Simandou. As part of the drive to bring back investor confidence, Rio Tinto held an event at Pilbara at the start of the week in which it provided some early information on the iron ore division ahead of its third quarter production results slated to be released late on Monday, Australian time.

The company's largest division saw iron ore production increase slightly to 83.9M tonnes compared to 83.5M tonnes prior, but within the guidance range for the company to sell 320-335M tonnes this year. Despite the ongoing troubles in China, the company upgraded its iron ore shipments guidance to the upper half of its previously guided range and kept the production cost outlook the same. The information for the iron ore segment was slightly below the midpoint of the consensus of analysts compiled by the company, which sees shipments this year at 328.2M tonnes. The question is whether that pattern will be replicated in Rio Tinto's other divisions, particularly in the copper section, which has been under pressure due to drought.

What Investors Might Be Looking At

The iron ore division's head provided an upbeat outlook to investors during the presentation, which contrasted with the vision provided by the group's CEO, Jakob Stausholm, last month. Investors might look more closely at the third quarter results to see what Stausholm meant when he said China's steel demand had likely peaked. And if there is an impact, will other divisions be able to replace the loss in growth, particularly the aluminium and copper production sections, which could benefit from the global transition to cleaner energy?

The other element in focus is that the company last quarter announced it would cut its capital expenditure this year. With interest rates only rising since then and expected to remain high for an extended period of time, will the company cut back on spending again? Last time around, the company cut its alumina production target for 2023, which could be a problem if the company wants to join in the energy transition boom, with aluminium being one of the key components of EV batteries.

Price Closer to Lower Range End

The share price of Rio Tinto is closer to the lower end of the range seen between 4500 and 6300, with a triple bottom at risk of breaking down while the stock remains below 5450. 3945 and 3520 are interim supports above the 3k handle. If bulls can reclaim the short-term resistance, 5832 might offer resistance, with a move past the range peak opening the door to 6800 and beyond.

Source: SpreadEx / Rio Tinto

Key Takeaways

Rio Tinto is expected to update its outlook amidst concerns about Chinese steel demand. The company has been working on developing the potentially largest untapped iron ore resource at Simandou to address underperforming shares. It recently revealed that iron ore production increased slightly and upgraded shipment guidance. However, investors are interested in whether this pattern will extend to other divisions, especially copper. Additionally, investors will pay attention to the impact of China's steel demand on overall growth and whether the company will reduce capital expenditure due to rising interest rates as it aims to contribute to the energy transition boom through aluminium production for EV batteries.