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Rio Tinto expects coronavirus impact on Q1 demand, supply chains

2020-02-27

Feb. 26, 2020 - Rio Tinto may feel the impact of the coronavirus in on demand for its products in the first quarter due to the "significant" near-term uncertainty that the virus has the potential to create, particularly in supply chains, executives at the diversified mining company said Wednesday.


The company's "very successful" financial performance in 2019, supported by higher iron ore prices and a strong dollar, even amid a weakening in the global economy and most commodities, has nonetheless put the miner in a resilient position to cope with the uncertainties, according to CEO Jean-Sebastien Jacques and CFO Jakob Stausholm.


"There are two key drivers for the mining industry, global GDP growth and trade," Jacques said in a results presentation. "Today, we face a very uncertain world on both drivers, due to the outbreak of the coronavirus...the Chinese economy has already been impacted -- mainly the services, construction and manufacturing sectors -- and supply chain disruptions are a real possibility.


"Whether the recovery is V shaped or L shaped will be in part a result of peoples' ability to return to work. Today our iron ore books are full, but we are likely to see some short-term impacts, such as in our supply chains and possibly in the provision of services from Chinese suppliers."


The Rio Tinto CEO noted that the Chinese government had many possible stimulus measures at its disposal "and we expect them to act. We believe this action will have a positive impact later in the year."


Analysts at brokerage Jefferies International acknowledged Wednesday that any stimulus from China from Q2 is seen likely to be "relatively commodity-intensive," which could favor Rio. Still, Jefferies sees that the risk to commodity prices in the near term is to the downside due to the demand shock to the markets due to the virus concerns, even though prices for iron ore and base metals have been "remarkably resilient" despite recent falls in equity markets.


For the analysts led by Christopher LaFemina, iron ore is "the gift that keeps on giving."


Jefferies said that "Rio Tinto is ramping up investment in its projects, with capex going from $5.5 billion to $7.0 billion, and iron ore prices should once again exceed consensus expectations....the Rio formula has worked in recent years, and we expect it to work again in 2020," they said, noting the company's 2019 EBITDA had come in higher than analysts' consensus.

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