The Slashes and Sell-Offs of Rio Tinto

While our political leaders push, shove and bicker like stupid kids in a playground, signs of a weakening economy continue to mount. Yesterday, Rio Tinto told investors it plans to slash $5 billion in costs by 2014. Mining services companies duly suffered more share price falls.

East coast coal mines are in the firing line. Falling prices, a strong Aussie dollar (meaning AUD price falls are even worse) and high labour costs are damaging the profitability of these once powerful profit engines.

Rio might be a ‘diversified miner’, but it’s really all about iron ore. It’s other large divisions, coal and aluminium, are increasingly becoming marginal producers, with more mine closures becoming a reality.

The US shale gas revolution is a major culprit. Plentiful gas supplies in the US are serving to weaken demand for coal. As a result, US coal producers are pushing more coal into the export market, competing directly with Australia’s once low cost, but now increasingly higher cost, product.

Ironically, Rio sold off its US coal assets in 2010 through the formation of Cloud Peak Energy, and the Australian Financial Review reports that the company has ‘stepped up plans to invest in infrastructure to sell more coal to Australia’s markets in Asia as costs rise.’

On top of that less than upbeat news from Rio, the Australian Bureau of Statistics reported yesterday that companies have scaled back their capital spending plans to $173 billion, from estimates of $179 billion just three months ago. Now that might not seem like a big deal, but as The Australian reports:

‘”It is very rare for companies to cut their investment forecasts at this early stage of the financial year and has only previously occurred in 1991 and 1974,” Barclays chief economist Kieran Davies said. “There is still going to be an enormous lift in resource investment, but there has been an unambiguous downgrade.”‘

Hmmm…1991 and 1974 he says…weren’t they the years of nasty recessions?

Of course, Australia is not going to have a recession in 2013. We’ve got the world’s best treasurer at the helm, and fine leaders punching on behind the toilet block, and there are always interest rates cuts. After all, the old zero interest rate ploy has worked a treat in Japan, the US and Britain.


Greg Canavan
for Markets and Money

From the Archives…

Why the Worst is Not Over For China’s Economy
23-11-2012 – Greg Canavan

Currency Devaluation: While Europe Gets Sinned, Australia Sins
22-11-2012 – Nick Hubble

The Pyramid of Real Wealth
21-10-2012 – Dan Denning

The Revival of US Manufacturing: An Update
20-10-2012 – Chris Mayer

Australia’s ‘Eggs-in-One-Basket’ Banking Sector
19-10-2012 – Dan Denning

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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