Please ensure Javascript is enabled for purposes of website accessibility

Instant Analysis: Rio Tinto Admits Commodities Rout "Not Temporary," Freezes All Employee Pay

By Rich Duprey - Jan 19, 2016 at 6:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Even the world's second largest and lowest cost producer is feeling the effects of iron ore's price decline.

What happened?
The toll from the global commodities rout continues to mount, and Rio Tinto (RIO 0.92%) says the situation is "not temporary." To prepare for the lean times ahead, the world's second largest iron ore miner is initiating a pay freeze that impacts all employees.

Does it matter?
Commodity prices are in free fall. Oil closed down below $30 a barrel last week, about 45% below where it traded a year ago, and almost 60% below its 52-week high. Gold is down 15% year over year and iron ore has fallen about 40% to $40 a tonne, consistent with the annual declines the mineral has experienced since 2013.

Yet iron ore is also the commodity most closely aligned with the health of the Chinese economy -- China is not only the biggest iron ore producer, but also the world's largest consumer -- and as the country's growth dramatically slows, the prospects of iron ore pricing turning around any time soon dims. The decision by Rio Tinto's management to rein in spending follows what's occurring elsewhere in the industry.

BHP Billiton (BHP 1.24%) wrote down the value of its shale assets by a massive $7.2 billion last week as oil prices plummeted, the second time in six months it was forced to do so, while Vale (VALE -0.30%), the world's biggest miner, is reducing its 2016 capital expenditure program to $6.2 billion from more than $8 billion. Rio Tinto is cutting the coming year's capex spending by $5 billion.

Yet the miner's decision to freeze all wages is significant because Rio Tinto is widely regarded as the industry's lowest cost producer, suggesting that if it's feeling the pressure of the slowdown then it may very well be a protracted and secular decline.

According to Australian Mining, which obtained a copy of an email Rio Tinto CEO Sam Walsh penned to employees, he said he expects 2016 will be worse than 2015, but perhaps not as bad as it will be in the future.

"This situation is not temporary and our industry is moving into the new normal which means we must continue to be one step ahead," Walsh wrote. "The pressure this is placing on our industry is significant and it is a tough time across the sector. It is important we recognise that the pressure isn't going to let up."

While many miners have lost 80% or more of their value as commodities have collapsed, Rio Tinto's losses have been among the least, perhaps reflecting its better position in the industry. It's not much, but it may be the only solace investors can take away from the dying outlook for minerals.

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

BHP Group Stock Quote
BHP Group
BHP
$57.25 (1.24%) $0.70
Rio Tinto plc Stock Quote
Rio Tinto plc
RIO
$60.21 (0.92%) $0.55
Vale S.A. Stock Quote
Vale S.A.
VALE
$13.17 (-0.30%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
395%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.