The Rio Tinto Ltd (ASX: RIO) share price performed strongly for shareholders during September, surging almost 16%. It materially beat the S&P/ASX 200 Index (ASX: XJO), which was up by 2.2% over the month.
The ASX mining share's iron ore division typically generates the biggest proportion of earnings.
Recent developments with China and the iron ore price have captured many headlines in the last couple of weeks and may be the key driver for the strong rebound of the Rio Tinto share price in September.
Let's look at what has rejuvenated investor confidence in Rio Tinto shares.
China launches financial stimulus
Last month, China launched a significant fiscal stimulus package in a bid to boost its struggling economy.
According to media reports, the People's Bank of China governor Pan Gongsheng announced that the Chinese central bank would reduce the reserve requirement ratio (RRR), which measures how much cash banks must hold in reserve. The RRR will be reduced by 50 basis points, which will unlock 1 trillion yuan (or US$142 billion) for new lending.
Pan also said that depending on the market liquidity environment later in the year, the RRR could be reduced by another 25 to 50 basis points (0.25% to 0.50%).
Another benefit for the Chinese economy is that the PBOC will also cut the seven-day reverse repo rate by 0.2 percentage points to 1.5%.
The Chinese property market is being supported through a 50 basis point (0.50%) reduction for existing mortgages and a cut in the minimum deposit required to 15% on all types of homes.
Other financial measures were also announced to boost the economy.
Iron ore price soars
According to reporting by the Australian Financial Review, the iron ore price soared 10% on Monday, the final day of September, to more than US$110 per tonne.
This commodity price is key for Rio Tinto's profitability because its mining costs don't change much month-to-month or even year-to-year. Therefore, when the iron ore price rises, the extra revenue largely adds straight onto the net profit after tax.
If the iron ore price were to stay above US$110 per tonne for the foreseeable future, it would mean the ASX iron ore share can generate a lot more profit each month than analysts were thinking a month ago.
What could happen next?
It's extremely difficult to predict what will happen next with iron ore because it's heavily dependent on Chinese demand, which has been unpredictable this year (and in the past).
Broker UBS' chief China economist Tao Wang and head of China property research John Lam believe "more is needed to appropriate stabilise property market activity and house prices, thereby supporting consumer confidence and ultimately consumption."
When UBS released a note on 25 September, it said that with its forecasts and view on the iron ore price and better free cash flow and valuation multiples, Rio Tinto shares screened "better value" than BHP Group Ltd (ASX: BHP).
