The Rio Tinto Limited (ASX: RIO) share price continued to fall today.
Down 2% before midday, shares of Australia's largest iron ore miner by volume have crumbled 20.5% in six months.
Although they have fared better than rival BHP Billiton Limited (ASX: BHP), which is down 35%; the Rio Tinto share price has been at the mercy of steep falls in major commodity prices like iron ore, copper and coal.
The price of Australian thermal coal has fallen 18% in 12 months, copper is down 22%, while iron ore is 34% weaker. Together, these three commodities generated more than 60% of Rio Tinto's 2014 revenue – the iron ore division accounted for over 90% of profit.
Unfortunately, the market price of major raw materials is mostly a function of China's demand, and that demand is primarily driven by infrastructure projects, such as property development, roads and railways.
China's demand is expected to plateau, as the country's enormous middle-class population shifts towards consumption (i.e. away from infrastructure-led investment) and the other problem for Rio can be found on the supply side of the market.
Supply from the world's major producers of seaborne iron ore is expected to grow in the next few years. That'll place more downward pressure on prices and continue to crimp Rio's profit margins, in my opinion.
Buy, Hold or Sell?
While Rio Tinto's share price looks cheap at today's levels, I think it – along with BHP – is best avoided. According to my basic valuation models, Rio Tinto and BHP shares are worth less than their current — seemingly discounted — prices. Remember: If you are not sure of their profit outlooks or valuations, you're not required to buy them.
Indeed, there are plenty of better dividend stocks on the market today…
