Rio Tinto share price: is this the top?

Rio Tinto share price in focus

Over the last year the Rio Tinto (ASX: RIO) share price has performed strongly, rising around 24% in that period.

That run-up has been fuelled by a buoyant iron ore market, which has seen the all-important commodity rise above the US$200 per tonne mark.

Yet as iron ore prices hover around these price levels, many have been left wondering, when not if, will these prices come back down to earth.

While some, such as Macquarie, have been perpetually bullish on the sector, others, like UBS see cracks emerging. The market, according to UBS, thinks iron ore’s long-term price level is somewhere between $US80-90 per tonne. UBS, by comparison, thinks the long-term price trajectory is closer to US$65 per tonne.

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Short-term vs long-term

This of course isn’t to say that the miners won’t continue to benefit in the short-term. At current prices, the iron ore heavy weights – the FMGs, BHPs and RIOs of the world – are essentially printing cash and throwing most of that off to shareholders in the form of hefty dividends.

How long can the good times last?

UBS says at least a year, noting that Rio Tinto will likely performance well in 2021. It’s further out that’s the issue.

Here's the three reasons UBS thinks iron ore will be pushed back down to US$65 per tonne:

• Latent capacity from large-cap and junior miners could potentially increase global iron ore output significantly over the medium term (3-years), with UBS estimating additions of approximately 190 million tonnes.
• ‘China aims to lift steel scrap supply from ~220Mt to 300Mt by 2025; this will displace ~90Mt of iron ore demand,’ the investment bank argues.
• The Simandou project – which represents one of the world’s largest iron ore mines – could bump up iron ore output by 200 million tonnes between 2025-2030.

Off the back of these views, and others, UBS this week lowered their rating on Rio Tinto from Neutral to Sell, though left their price target unchanged, at $104 per share.

Revisiting the Q1

Looking back at Rio’s most recent Q1 results, the miner reported a strong set of operational figures, revealing elevated iron ore shipments.

Here the miner said it shipped 77.8 million tonnes of iron ore during the quarter, representing a 7% increase year-on-year.

Other segments fared less well, with bauxite, copper and titanium production all down.

Commenting on those results, the miner's Chief Executive, Jakob Stausholm said:

'We achieved an overall solid operating performance in the first quarter. We have maintained guidance ranges in all our products, with site teams successfully managing the effects of significant rainfall, in particular at our Australian iron ore assets.'