Rio Tinto has warned that labour shortages, muted Chinese demand, falling commodity prices and the threat of recession are raising “considerable” headwinds, despite reporting a significant increase in iron ore production from its Australian mines in the June quarter.
The Anglo-Australian miner said demand from its biggest market China had “troughed” in May because of Covid-19 lockdowns. While demand recovered in June, the company said that “uncertainties remain given the potential for ongoing outbreaks”.
The market update released on Friday came as China narrowly missed a second-quarter contraction in the three months to June after Covid outbreaks prompted harsh lockdowns in economically significant areas including Shanghai and Beijing. The result was well below economist expectations of 1.2 per cent growth.
Rio Tinto, which is dual-listed in London and Australia, said in the update that “growing recession fears and a decline in consumer confidence” had pushed commodity prices down in the quarter. It cited Russia’s invasion of Ukraine as another factor behind economic headwinds.
“Trade disruptions, food protectionism and the global focus on securing energy supplies continue to put pressure on supply chains, which will need to be significantly eased before inflationary pressures subside,” the company said.
Rio produced 78.6mn tonnes of iron ore from its Pilbara operations in Western Australia in the three months to the end of June and shipped 79.9mn tonnes. That was up 10 and 12 per cent, respectively, on the three months to March — a particularly weak quarter — and beat many analyst forecasts. Rio will release its first-half financial results on July 27.
The miner’s share price was down 2 per cent on Friday afternoon. The stocks of fellow iron ore miners BHP and Fortescue also fell. Analysts at Barrenjoey and Royal Bank of Canada predicted the result would prompt earnings forecasts to be downgraded.
Glyn Lawcock, head of resources research at Sydney-based investment bank Barrenjoey, said Rio’s iron ore result was a “bright spot”. The company also downgraded its aluminium production forecast and missed market expectation for copper production.
“If you go to the most import division right now, which is iron ore, the business had a very credible quarter,” he said, adding if the company could quickly ramp up production at the Gudai-Darri mine, it would put them “on a stable footing”.
Lawcock said he expected the iron ore price to dip below $100 a tonne over the next three months, down from $106 at market close on Thursday.
Friday’s statement contained no financial results and left iron ore shipment guidance unchanged for the half year.
The results compensated for weak first quarter production, when labour shortages caused by Covid delayed the opening of the new Gudai-Darri mine to replace falling production at its ageing iron ore mines. Rio said the mine had produced its first iron ore in June and would reach full capacity next year.
For the half year, Rio said shipments were down 2 per cent on the corresponding half, which it blamed on skilled labour supply constraints. Australia’s labour market is the tightest it has been since 1974, official figures revealed on Thursday, with an unemployment rate of just 3.5 per cent.
Rio said a growing Covid outbreak in Australia was also to blame for “elevated levels of unplanned absences” at its Pilbara operation.