China’s property crash has decimated the iron ore price. So what’s the outlook for Rio Tinto shares?

The Rio Tinto Limited (ASX: RIO) share price is down 0.72% today to $97.92 as fears of further trouble in China’s property market create concern about the outlook for iron ore.

Fellow ASX mining shares are also falling today. The Fortescue Metals Group Limited (ASX: FMG) share price is down 2.04% to $16.77. The BHP Group Ltd (ASX: BHP) share price is down 1.26% to $40.66.

There is no news from Rio today. However, ongoing discussion about China’s slowing economy is likely weighing on the Rio Tinto share price.

According to reporting in the Australian Financial Review (AFR) today, Reserve Bank deputy governor Michele Bullock says China’s stressed property market and COVID-zero policy are among their top concerns for the Australian economy.

China’s property market is floundering, which means reduced new construction. On top of that, its COVID-zero policy means lockdowns have and may continue to disrupt industrial activity. The direct result of these two factors is less demand from Australia’s biggest iron ore customer.

‘Steepest downturn in years’ for China’s property sector

Lesser demand from China has led to a fall in the iron ore price. It has almost halved from its 52-week peak of about $160 per tonne in March. Today, it’s fetching US$91.50 per tonne, up 0.55% overnight.

That’s a long way off its all-time record high of about US$240 per tonne back in May 2021.

According to reporting on abc.net.au today, UBS resources analyst Lachlan Shaw said:

We’re seeing the steepest downturn in property activity in China, in years, arguably decades, as the industry there struggles with liquidity and policy from the government.

The combination of developer funding challenges and lack of demand is seeing property purchases in China very, very weak.

That’s been traditionally, for the last decade or two, probably a third or more of China’s steel demand, and therefore over a sixth of global steel demand.

According to Trading Economics, investment in China’s “debt-ridden” property market has fallen by more than 8% year over year. In October, lower steel demand drove iron ore imports down by 4.7%.

Head of research for MCA Michael Slack is also concerned that supply is about to increase. All the major miners in Australia have built, or are building, new iron ore mines.

Slack writes on Livewire:

Looking forward, we see growth in iron ore supply, particularly out of Australia, Brazil and Africa, exceeding growth in Chinese demand thereby pushing the iron ore market into surplus and impacting price.

If China continues along this path and allows the property sector to wallow, iron ore pricing and resource companies may suffer along with it.

Because of this demand overhang and its potential impact on resources stocks, we currently hold an underweight exposure to iron ore in our value equity strategy. 

‘Long-term future for iron ore is strong’: Rio Tinto boss

Rio Tinto’s iron ore CEO, Simon Trott, says all this talk is about the relative short-term future.

Trott told the ABC:

We are seeing some short-term weakness, particularly with inflation and interest rates rising in the Western world, and those events, combined with some impact from COVID lockdowns on the property sector in China, and so we have seen a pullback in iron ore prices of late.

But the long-term future for the iron ore business is strong, the world continues to need steel and will continue to need steel for the lives people want to live as well as future decarbonisation.

The investment decisions we make are based on our view over decades, so our long term belief in the iron ore market is unchanged.

It’s worth remembering that while daily fluctuations in the iron ore price do directly impact ASX iron ore shares, Rio is a diversified miner. This means the business doesn’t hinge solely on the iron ore outlook.

Iron ore represented 66% of Rio Tinto’s underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) for the six months to 30 June 2022.

The company also mines aluminium, copper, and other minerals including diamonds and titanium.

Rio Tinto share price snapshot

The Rio Tinto share price is down 4% in the year to date. Over the past 12 months, it’s up 13%.

Compare that to iron ore pure-play miner, Fortescue.

The Fortescue share price is down 15% in the year to date and up 17% over the past months.

The post China’s property crash has decimated the iron ore price. So what’s the outlook for Rio Tinto shares? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bronwyn Allen has positions in BHP Billiton Limited and Fortescue Metals Group Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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