The Rio Tinto Ltd (ASX: RIO) share price has fallen more than 21% since May 2024, as we can see in the chart below. I get excited when industry giants are sold off because it can mean they're a buying opportunity.
It's normal for there to be volatility in the commodity space due to the supply and demand dynamic between the various buyers and sellers. For ASX iron ore shares like Rio Tinto, China is the key buyer.
I often like to say that the iron ore price is cyclical, so we can identify contrarian opportunities in the space at the right time. And with the recent ongoing weakness, I think Rio Tinto shares could be an intriguing proposition for two reasons.
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Iron ore weakness
The iron ore price has plunged 10% to close to $90 over the past week, representing the worst weekly drop since February.
According to reporting by Trading Economics, the decline was due to soft economic data and weak demand prospects for steel. The latest data showed that China's manufacturing activity remained "contractionary" in August, while services sector growth slowed.
Another headwind for iron ore miners is that Chinese steel mills are experiencing reducing profits, despite the fall of the iron ore price. New home prices in China also rose at a slower pace in August.
Rising iron ore inventories at Chinese ports continue, which is another weakness in the country's supply-demand relationship.
None of these conditions are positive, so they largely explain why the iron ore price and Rio Tinto share price have fallen so far.
I believe it's during times like this, where there is no positive catalyst in sight for the foreseeable future, that we are presented with the best prices for commodity businesses. If the Chinese economy rebounds, the iron ore price could start recovering.
We don't know when or if the iron ore price will rise though. But, with the Rio Tinto share price as low as it is, I think the dividend yield could help compensate us during this period.
According to the Commsec estimate, the miner could pay a grossed-up dividend yield of 8.8% in FY25, based on the current Rio Tinto share price.
In the longer term, I believe the huge Simandou project in Africa could have low mining costs and large profit margins.
Cheaper exposure to copper
With Rio Tinto's valuation dropping, we can now gain the miner's exposure to copper for a cheaper price.
I think copper has a much clearer growth outlook – it's important for global electrification and decarbonisation.
Rio Tinto has various projects, including Oyu Tolgoi in Mongolia, one of the world's largest known copper and gold deposits, and the Kennecott mine in the United States.
A copper shortage is predicted in the coming years as it becomes increasingly difficult to find high-quality copper deposits.
As more copper production comes online, I think Rio Tinto's copper earnings can grow and play a more important role in the company's earnings. It's this growing exposure to copper that makes me believe Rio Tinto shares are a contrarian buy for the long term at this beaten-down price.
