Shares in Rio Tinto PLC (LON:RIO) sank in mid-morning trading Wednesday after City broker Liberum downgraded the firm to ‘Sell’ from ‘Hold’ amid faltering steel prices and what it saw as a weaker demand for iron ore.
In a note to clients, analysts said that despite a “bounce” in the shares caused by a revival in Chinese steel and benchmark iron ore prices for the third quarter, indicators for the iron ore market were currently “looking shaky” as margins for steel were dropping along with declines in mill profitability.
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“Our base case is that demand weakness will continue to erode Chinese steel mill profitability and ultimately drive iron ore grade premiums lower” analysts said, adding that a weakness in demand looked set to continue based on previous credit cycles and another weak print of Chinese credit growth yesterday, which reported that all-system aggregate financing in the country had missed estimates by around 572bn renminbi.
These factors will be bad news for the FTSE 100 miner, which operates the world’s largest portfolio of integrated iron ore assets at its Pilbara operation in Western Australia.
Liberum also said that an increase in aluminium exports from China was likely to signal weak prices for the metal and sluggish domestic demand in the country as has occurred in the past.
As a result of the metrics, analysts said that it saw prices coming under pressure, and therefore cut its target price for the firm to 3,350p from 3,600p alongside the rating downgrade.
Rio Tinto shares were down 2.9% at 3,734p.