Shares of Rio Tinto Limited (ASX: RIO) have fallen 5.6% in the past week, versus the S&P/ASX200's (ASX: XJO) (Index: ^AXJO) fall of just 0.8%.
It seems a world ago when Rio shares were trading above $150. No doubt there'll be some investors out there still waiting for a turnaround.
Unfortunately, it's hard to believe we'll see Rio shares hit $70, let alone $150, anytime in the near future.
Why?
Commodity prices, that's why.
First it was aluminium. The metal's price has fallen from $US3,030 per tonne in 2008 to around $US1,820 per tonne currently.
Then it was coal. Over the same period Australian thermal coal is down from more than $US180 per tonne to around $US65 per tonne.
Uranium was next. In 2007, it was priced as high as $US136 per pound. Despite a recent rally, in February it averaged just $US38 per pound.
Now, the fundamentals of iron ore are looking bleak. Four years ago it peaked at $US187 per tonne. Today it trades for just $US57.61 per tonne and will likely fall further.
Finally, the outlook for Copper isn't promising either. Since 2011, grade A cathode prices have fallen from $US9,880 per tonne to $US5,730 per tonne.
For Rio Tinto, the falling iron ore prices will hurt more than any commodity, given its increasing dependence on the steel-making ingredient.
As the next chart shows, in 2008 iron ore accounted for 27.5% of revenues. In 2014, it was 46.2%.
Source: Rio Tinto's 2009 and 2014 Annual Reports.
But if you thought that was bad, in 2014 over 90% of Rio's profits came from the iron ore division alone!
Should you hold or sell?
Joe Magyer, chief investment officer of Motley Fool Pro, recently travelled to China for a research trip and what he found will shock you. Since China accounts for approximately two thirds of the world's iron ore consumption, I strongly recommend you read his report before even considering buying Rio Tinto or BHP Billiton Limited (ASX: BHP), or any other iron ore, coal or copper miners' shares!
