Rio Tinto Limited (ASX: RIO) shares have been frequently making an appearance on the ASX's list of 20 most shorted stocks in recent years.
Short positions for Rio's stock were 8.9% of total product in issue on Monday last week, compared to 3.5% on October 11, 2010.
In comparison, Fortescue Metals Group Limited (ASX: FMG), which was once the most shorted of the iron ore heavyweights could soon have the least short positions of the lot, with short sellers moving onto Rio Tinto and BHP Billiton Limited (ASX: BHP) instead.
Why are short sellers turning away from Fortescue?
Short sellers were previously drawn to Fortescue by its debt fueled expansion program and volatile commodity prices. The expansion program allowed for the building of infrastructure capable of producing 155 million tonnes of iron ore a year, while BHP and Rio were instead investing billions in assets that are now being sold off.
Fortescue now has one of the lowest iron-ore production costs in the sector and its shares returned 50% to investors over the last 5 years. With their de-gearing program now at full speed punters are looking elsewhere for opportunities.
Why have short positions on Rio jumped in recent years?
Arbitrage seekers
Analysts suggest the growth in short positions in Rio Tinto could be attributed to traders seeking arbitrage between the company's Australian and London listed stocks. Rio's Australian shares are currently trading at a 10% premium to its London-listed stock, and shorting Rio's Australian shares could provide a tidy profit.
Lower export forecasts
Rio recently scaled back its export forecasts for iron ore after first quarter disruptions due to weather conditions and rail maintenance. The annual production target was also lowered for metallurgical coal following Cyclone Debbie in March.
Iron ore shipments from Australia's west coast are now expected to be about 330 million metric tonnes in 2017, falling short of the 340 million target for the year.
Are shares in Australia's mining sector overvalued?
Rio Tinto is currently leading a mining surge on the ASX as the sector benefits from strong demand in China and high commodity prices. Rio closed at $70.55 on Monday, its highest closing price since February 2014.
Some analysts believe shares in the sector may be overvalued because the market is over-estimating future demand for commodities.
The recent surges in demand and prices could only be cyclical and with analysts predicting Chinese steel consumption to slow in the next 10 years, the mining surge may very well be short-lived.
