Is Rio Tinto Limited (ASX: RIO) a turnaround opportunity?
It's a question I'm sure many Australian investors have asked once or twice in recent years.
And the answer is: I don't know.
Let me explain…
Rio Tinto, as we know, derives a huge amount of its profits from iron ore.
Iron ore is one of the ingredients used to make steel. That's the stuff that keeps trains on track and skyscrapers in the sky – among other things.
Therefore, we know Rio Tinto is indirectly dependent on more buildings getting built, freeways getting laid and other steel intensive infrastructure being constructed.
Once steel is used in these types of projects it's unlikely to be needed again for many years.
That's where China comes into the equation. As noted by Fairfax press today, China accounts for about half of all global steel supply.
Unfortunately, demand may be falling, swirling, retreating, shrinking or even growing depending on which analyst you ask.
In fact, according to the article, analysts from Australia and New Zealand Banking Group (ASX: ANZ) recently revised their peak steel consumption forecast for China from 2020 to 2014. What's six years of growing steel consumption between investors, anyway?
And herein lies the problem for Rio Tinto and, in turn, investors.
China accounts for a 38.2% of Rio Tinto's total sales (not just iron ore), up from 32% in 2012. Unfortunately, the outlook for infrastructure growth in China is undoubtedly clouded by the government's ambition to transition the economy from infrastructure-led to consumption based.
Last time I checked, less steal goes into cars, televisions and clothing than high-rise apartments.
Is Rio Tinto a buy?
Now, I'll admit, Rio Tinto and its major iron ore producing brethren such as BHP Billiton Limited (ASX: BHP) and VALE, are unlikely to go bust under current market conditions. In fact, they'll probably grow their market share.
However, survival does not equal market-beating returns for investors. Indeed, there will likely come a time to buy Rio Tinto shares for the inevitable rebound in the iron ore price – which is down 40% over the past year.
But why would you take the risk?
As always, the words of legendary investor, Warren Buffett, ring loud and true: "Turnarounds seldom turn."
