The Rio Tinto Limited (ASX: RIO) share price is sinking. It has fallen by 17% in just the last month. What’s going on?
Rio Tinto’s tough time
In the month that Rio Tinto has fallen, one of the factors that has hurt the share price was that Rio Tinto has gone ex-dividend, just under a month ago. That means that shareholders prior to 12 August 2021 were entitled to a dividend of $7.60 per share. If investors bought on or after 12 August 2021, it means they wouldn’t receive the dividend.
So I think that the dividend explains some of the decline.
But there’s also the fact that the iron ore price is sinking. Rio Tinto is a commodity-focused business, just like any other miner. The resources giant has benefited from the strong iron price, but now it’s suffering as the iron price goes back down again.
Why is the iron ore price suffering?
Resources are a great example of supply and demand. Iron ore is suffering on both side of that economic relationship.
China is lowering its demand, with authorities telling steel-making regions to slow down the making of steel. But supply is also rising. The last year or two has been hard on the Brazilian iron ore industry. Brazilian production is expected to keep increasing, bringing on more competition to the Australian miners.
Seeing as China is the biggest consumer by far of iron ore (and steel), it means they have a lot of the power in the relationship.
What next for the Rio Tinto share price?
Valuations tend to follow earnings (and profit expectations). I don’t think we are going to see the iron ore price above US$200 any time soon.
But I do think it was a very smart move of Rio Tinto to expand in the lithium sector. The project it has in Europe is very promising. It could be a big supplier to the European market in a decade from now. But that’s the future.
The valuation is still dominated by the iron ore profits. If the iron price and Rio Tinto share price fall hard enough, it could be worth a look. But I’m not thinking Rio Tinto shares are a buy yet.
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