Rio Tinto Group has set what’s likely to be the tone for the world’s biggest miners: lower profits and dividends as China’s wobbling economy casts a shadow over the entire sector.
(Bloomberg) — Rio Tinto Group has set what’s likely to be the tone for the world’s biggest miners: lower profits and dividends as China’s wobbling economy casts a shadow over the entire sector.
Just two years ago the mining industry was on a tear. The boom in demand as the world emerged from the pandemic combined with supply bottlenecks to create a bonanza for the industry, with nearly every major commodity hitting all-time highs. That meant record profits and returns for the companies mining the raw materials that keep the world running.
Yet since then, much of the steam has come out of the global economy. Inflation has dogged the West, threatening to tip major economies into recession, and more importantly for the mining industry China’s economy has stated to wobble, especially its crucial property sector that sucks up much of the world’s iron ore.
Today, the impact was made crystal clear. Rio reported a steep drop in profit and dividends, with both falling by about a third from a year earlier. Yet it’s a comparison with two years ago — when profits were at a record — that’s most striking. In that period, Rio’s underlying profits have fallen from $12.2 billion to $5.7 billion and its dividend from $9.1 billion to $2.9 billion.
Behind that plunge are concerns about China’s wider economic fortunes and more specifically its property sector. China’s output grew more slowly than expected last quarter and other data is flashing warning signs on everything from consumption to trade. Top Chinese leaders have signaled a more “dovish” stance on policy going forward, but are still likely to hold off on massive stimulus.
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In China, real estate has been slumping for two years, partly due to a government clampdown on corporate and household leverage. Economists have pointed to the property crunch and weak private sector confidence as the main challenges to the country’s official economic growth target of about 5% this year.
Rio’s Chief Executive Officer, Jakob Stausholm, said Wednesday that he was confident China’s government could successfully navigate the challenges it faces.
“We are deeply ingrained in the Chinese economy, it’s our biggest market,” Stausholm said. “The Chinese have quite an impressive ability to manage the economy. For sure they have some challenges, but in the past they have had that and managed it well.”
Rio’s shares fell 1.6% in London trading, bringing this year’s decline to 8.5%.
Growth Drive
The decline in earnings comes at a crucial time for the mining industry, with the sector now poised for a period of growth after years focused on shareholder returns.
Rio itself completed its biggest deal in a decade last year, spending $3.1 billion to gain more control of a giant copper mine in Mongolia. It’s also aiming to build a mine at the world’s biggest untapped iron ore deposit in Guinea and develop a lithium business.
Rio’s rivals have been even more ambitious.
Glencore Plc has spent much of this year engaged in a bruising fight with Teck Resources Ltd. after making an unsolicited offer for the Canadian company. The latest twist in the saga came last month, when Glencore proposed buying Teck’s steelmaking coal business for about $8 billion as an alternative to its full takeover bid.
BHP Group, the No. 1 miner, earlier this year bought copper producer OZ Minerals Ltd. for about $6.4 billion, its biggest deal in years.
Rio results today were broadly in line with analyst expectations and its dividend was consistent with its 50% of its underlying earnings policy. The company also reported revenue of $26.7 billion.
Anglo American Plc is the next big miner to report earnings, with its first-half results expected Thursday, along with those of Teck. Vale SA will report on Friday, with Glencore and BHP coming next month.
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