The Rio Tinto Limited (ASX: RIO) share price continues to fall and I think that this makes it a more interesting proposition for investors.
Looking at what’s happened, Rio shares have fallen by 10% over the last month and 25% over the past six months.
That’s a hefty decline for one of the ASX’s biggest blue chip shares.
A business isn’t automatically worth buying because it has fallen. A share can be expensive after dropping (or cheap despite rising).
Why is the Rio Tinto share price falling?
The market can be volatile on its own. It can send businesses down for no particular reason.
But resource businesses like Rio Tinto are largely reliant on the commodity price that they extract from the ground to make an attractive profit.
Over the last five or so months, the iron ore price has lost roughly half its value. That puts a big dent in Rio Tinto’s profit potential.
I’d attribute that as a key reason why the Rio Tinto share price has dropped so much.
Why has the iron price fallen?
That’s a bit trickier to answer and is somewhat guesswork.
You would have to ask all the buyers of iron ore why they have shaved roughly US$100 off the price they were willing to pay per tonne.
There have been a few different possible factors. It’s usually all about supply and demand.
China is the key buyer of iron ore from Australia. The Asian superpower has been trying to lower its emissions (from steel making) recently, with officials reportedly telling steel makers to reduce output.
Next, there have been major concerns about the Chinese real estate market. There are some developers, such as Evergrande, which seem close to defaulting on their substantial debt and collapsing. The Chinese property developers are big users of steel, and therefore iron. There would be less demand, for a while at least, if they disappeared.
On the supply side, Brazil – the other major global iron ore producer – is recovering from hits to its iron production volumes from COVID-19.
Is the Rio Tinto share price worth looking at?
The iron ore mining giant is unlikely to achieve the type of capital growth that other businesses may be capable of, due its size and the nature of it being a commodity player, which is usually cyclical.
However, if you’re willing to consider resource shares then I think it could make sense to think about Rio Tinto after it has seen such a heavy fall.
The company has a bonus opportunity because it seems on track for the Jadar lithium project. This would diversify its earnings and see it move away from relying on Chinese demand for iron. The ramp up will see full production in 2029 when it will be the largest source of lithium supply in Europe. It could supply enough lithium to power over one million electric vehicles per year.
