Can Rio Tinto PLC Rule The World?

The world needs metals, whether it is steel for construction, copper for electronics or the gold that is the bedrock of our economies. These metals are valuable commodities, and so it must follow that the companies who prospect, mine and process these resources must also command significant global influence.

In terms of market capitalisation, the three largest miners are BHP Billiton, Vale and Rio Tinto (LSE: RIO) (NYSE: RIO.US). Vale and Rio Tinto have yo-yoed for second place since 2005; the fourth largest player in the league tables is China’s Shenhua Energy, with less than half of Rio Tinto’s market capitalisation.

Rio Tinto mines iron ore, aluminium, uranium, salt, coal, copper, nickel, gold, silver and diamonds. It operates across six continents, and Rio Tinto’s gross sales revenue for 2013 was US$ 55 billion. Its strategy for 2013 was to retrench, become “a leaner, more cash-oriented and tightly run business”.  It fulfilled its promise to return wealth to shareholders, with a hefty 15% increase in full-year dividend to 192 cents per share.

However, storm clouds are gathering: in addition to the internal inefficiencies that Rio Tinto identified, it acknowledges that the mining industry is a cyclical animal and is now due for a period of falling commodity prices. Some commentators are predicting that prices may soon fall to the marginal cost of production for iron ore. 48% of Rio Tinto’s gross sales revenue in 2013 was from sales of iron ore.

The main customer for Rio Tinto’s iron ore is China’s steel-making industry, which consumes 70% of the world’s total production of this commodity. China wants to reduce this figure and end its steel-making industry’s dependence on imports, so it has plans to set up a conglomerate of iron-ore mining giants that it hopes will produce half or more of its domestic ore within 10 years.

In addition, the market for aluminium is difficult and Rio Tinto’s chairman says: “Aluminium will improve over time, but at the moment we are stuck with low LME (London Metal Exchange) prices and we’ve just got to survive through this period.” 

Rio Tinto’s directors are preparing to batten down the hatches and sit out the impending stormy season — any race for first place of the super majors is firmly off the agenda.

For Rio to take pole position, there must first be intent — this giant miner currently has other objectives and is therefore, not any time soon, going to rule the world.