Rio Tinto (LSE:RIO) shares have fallen nearly 20% over the past months. Mining stocks had been on somewhat of a bull run this year as commodity prices soared. But that’s come to an abrupt halt now.
In fact, Rio Tinto is trading near its 52-week low, which was £43.54, back in the autumn of 2021.
So, what’s behind the falling share price, and is now the time for me to buy?
Downward pressure on commodities
Negative economic forecasts around the world have impacted commodity prices in recent months. And this impacts Rio Tinto as it produces a host of raw materials including copper, iron ore, bauxite, diamonds, uranium and industrial minerals such as titanium dioxide, salt, gypsum and borates.
Commodities notably have been affected by economic woes in China. Lockdowns are slowing economic growth, but there’s now increasing concern about China’s banking sector, and the impact on the availability of cash and eventually economic performance.
The Iron ore price tumbled below $100/tonne on Friday amid news that the Chinese economy was slowing. China’s economy contracted by 2.6% in the second quarter from the previous quarter due to Covid-19 lockdowns. It’s worth remembering that the price of iron ore hit record highs of more than $210/tonne in June 2021.
Rio Tinto is currently highly dependent on iron ore – it contributed 59% of revenues last year. And last month there was more downward pressure on iron as reports emerged that China would once again attempt to centralise national procurement on the raw material.
Prospects
In the long run, I’m fairly bullish on commodities. This is because I believe we’re entering a period of scarcity, characterised by intense resource competition. As such, the price of commodities is likely to remain high over the next decade.
Specifically, demand for lithium — a material used in EV battery production — is forecast to rise by 25%-35% a year over the next 10 years. Moreover, EVs require four times as much copper as conventional combustion-engine cars.
There are more trends that are likely to benefit miners in the long run. Infrastructure spending is anticipated to boom in the coming years, triggered by urbanisation trends, notably in developing economies.
Rio Tinto also has a strong net cash position (£1.3bn), which is certainly a positive in an era of rising rates. Net financial costs were covered 172 times by earnings during the last reporting year.
Should I buy Rio Tinto shares?
Rio Tinto looks like a good addition to my portfolio for the long run, but I appreciate that there may be a better entry point later in the year. For example, I only see Chinese lockdowns becoming more widespread and severe, and this should push Rio Tinto and its peers lower. As such, I’d probably want to see the share price closer to £40 before I buy.
But, I’d also buy this stock for its dividends. The current yield is a whopping 12% but that’s forecast to come down. After all, iron ore prices are half what they were a year ago and Rio Tinto isn’t going to be registering figures like it did in 2021.