26th Apr 2022 14:29
(Alliance News) - Barclays on Tuesday downgraded its recommendation for Rio Tinto PLC, explaining the miner faces a hit from rising labour costs in Australia and a poor outlook for iron ore.
Among the miners in the investment bank's coverage, Rio is among the "most leveraged" to iron ore prices, Barclays said.
Barclays lowered Rio Tinto to 'underweight' from 'equal weight'. It lifted its price target to 4,800 pence from 4,400p.
Rio shares were 1.0% higher at 5,427.00 pence each in London on Tuesday afternoon.
The investment bank said iron ore prices have been bullish year-to-date, thanks to strong steel production in China as well as poor supply of seaborne iron ore.
These tailwinds will reverse over the course of the year, Barclays predicts.
"Chinese steel production typically peaks in May before declining, while seaborne iron ore supply seasonally rises from a low in Q1," Barclays explained.
"Progressive growth in low-cost supply, combined with softening crude steel production in China, drives iron ore into a multi-year period of surpluses to 2025, on our numbers."
Barclays noted in 93% of the occasions that iron ore prices have fallen more than 5% month-on-month, Rio Tinto's shares have also declined.
Anglo American PLC shares fell more than 20% between last week Thursday and Monday this week, after it cut annual guidance in its first quarter production report. That should serve as a warning to Rio Tinto, Barclays added.
"We see potential for Rio to deliver something similar over the coming months, based on downside risk to its iron shipments guidance and upside risk to unit cost guidance on the back of an increasingly inflationary operating cost environment," the investment bank added.
Finally, rising wage costs could also hurt Rio Tinto. Barclays says wage inflation in Australia is heading back to 2006-2008 levels, which were between 15% and 20% year-on-year.
In Australia, Rio Tinto operates the Pilbara iron ore mines.
Barclays added: "In addition, Rio has guided to a 12% higher work index in 2022, increased maintenance at its processing plants and heritage impacts on productivity. Overall, we see Pilbara unit costs up 18% year-on-year in 2022 versus consensus of up 8%. Meanwhile, Q1 shipments suggest the bottom of the guidance range could be at risk."
Last week Wednesday, Rio said it saw a "challenging" quarter from its key Pilbara iron ore operations, though the miner left annual guidance unchanged.
In the first three months of 2022, total iron ore shipments from the Western Australia-located asset fell 8% annually to 71.5 million tonnes. Quarter-on-quarter, shipments declined by 15%.
Iron ore production from Pilbara fell 6% yearly to 71.7 million tonnes and 15% from the fourth quarter of 2021.
By Eric Cunha; [email protected]
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