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Have Rio Tinto shares peaked due to iron ore price uncertainty?

There are concerns that the Rio Tinto share price has run out of steam after making all-time highs last month. Swiss bank UBS downgraded Rio Tinto shares this week, citing a sharp decline in iron ore values in the coming months.

  • Rio Tinto shares up 24.49% in the last 12 months
  • UBS downgrades Rio Tinto from neutral to sell
  • All-time highs of $132.94 reached on 10 May 2021
  • Ready to trade the Rio Tinto share price? Open an account today

Why have Rio Tinto shares decreased by almost 2% in the last five days?

Shares in Rio Tinto have fallen 1.96% in the last five days of trading, influenced by the downgrade by UBS from neutral to sell for the stock. UBS has issued a new sell rating price target of $104.00, suggesting a possible drop of more than 13% from its current market price in the next year, excluding dividends.

The root cause of UBS’ bearish view on Rio Tinto shares is underpinned by a forecasted decline in the price of iron ore over the next 12-18 months.

UBS analysts believe the vital ingredient for the steel industry is likely to experience multiple issues coming to a head soon. These challenges include the increased supply of Brazilian iron ore, bigger than usual stockpiles of iron ore at Chinese ports, and attempts from regulators in the People’s Republic to curb the price of its commodities.

They believe iron ore could fall by more than 50% ‘over 12-18 months’ and add that the current Rio Tinto valuation is therefore not ‘compelling’ based on the ‘normalised iron ore price’.

Is it possible that the Rio Tinto share price has reached the top?

Rio Tinto shares have been an immense long-term investment for retail traders, having risen 186.83% in the last five years and 6.49% in the year to date. On 7 May 2021, the Rio Tinto share price reached all-time highs of $127.11 fuelled by the commodity surging in recent months to the $200 per tonne mark.

There are multiple reasons why UBS analysts believe the price of iron ore could fall to $90 and even as low as $65 in the next couple of years. This includes an expansion in latent capacity among large-cap and junior miners, which should accelerate iron ore output by approximately 190 million tonnes.

A representative of one of the world’s biggest iron ore mines, the Simandou project, also aims to accelerate its iron ore output by an additional 200 million tonnes from 2025 onwards. All of which could see supply far outstrip demand again in the post-Covid-19 economy.

Can autonomous technology improve Rio Tinto’s productivity and operational efficiency?

One area that Rio Tinto is looking to enhance its operational appeal with investors is its use of world-leading technologies. It is soon to launch the world’s first fully autonomous water trucks at its iron ore mine in Pilbara, Western Australia.

Its collaboration with equipment manufacturer Caterpillar has led to the development of three automated water trucks. The trucks are fitted with an intelligent onboard system that can apply water to roads to improve site conditions. The 160,000-litre trucks will help to ‘improve productivity’ whilst reducing ‘water usage across [its] operations’, according to Rio Tinto Iron Ore CEO Simon Trott.

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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