Rio Tinto warns of biggest cost shock in almost 50 years

After rallying hard close to record highs, Rio shares have fallen sharply after this first quarter update. Our City expert explains why.

Momentum in the mining sector was checked today after Rio Tinto (LSE:RIO) reported a “challenging” first quarter performance and likened current cost pressures to the 1973 oil crisis.

Rio shares fell 218p to 5,924p in the FTSE 100 index and Glencore (LSE:GLEN) and Anglo American (LSE:AAL) also came under pressure after the world’s largest iron ore producer said shipments from its Pilbara-based assets fell 8% annually to 71.5 million tonnes.

Production was 6% lower in a performance impacted by a rise in Covid cases in Western Australia in March, but Rio continues to expect increased volumes and improved product mix in the second half.

Chief executive Jakob Stausholm said: "Production in the first quarter was challenging as expected, re-emphasising a need to lift our operational performance.”

Rio shares are now back where they were at the end of March, albeit 20% higher across this year. A day ago, Goldman Sachs raised its recommendation to “buy” from “neutral” and lifted its price target from 5,460p to 7,300p.

Retail investors also sensed an opportunity after today’s losses, with Rio and Glencore among the top 10 most-traded shares on the interactive investor platform.

On top of extensive iron ore mining in Western Australia, Rio has copper operations in the US, Mongolia and Chile and bauxite mines and alumina refineries as well as smelters producing aluminium.

Rio’s first quarter update provided an extensive review on market conditions after sustained high inflation, the Ukraine war and resurgence of Covid-19 lockdowns in China deflated pandemic recovery optimism earlier in the year.

The company warned: “Further downside risks include a prolonged war and other geopolitical tensions, extended labour and supply shortages, and monetary policy adjustments to curb inflation.”

Commodity prices continue to be elevated due to actual and expected disruptions to supply, but Rio said it expects demand to be underpinned by the global energy transition and near-term Chinese policies that are becoming more growth focused.

However, it also drew comparisons with the 1970s oil shock, when Middle East producers stopped exporting crude to the West. Such conditions have the potential to slow demand from Rio’s steel-making customers, as well as strain the mining industry’s own overheads through rising fuel, wage and transport costs.

Rio said: “Recent input cost increases are the largest raw material cost hike since the Oil Crisis in 1973. ”

It added that iron ore prices were volatile but 33% higher at the end of the quarter as supply concerns caused by the war in Ukraine have outweighed muted demand growth and a crackdown on speculative trading behaviour in China.

Aluminium was up 25% at the end of the first quarter, but Rio said copper had not experienced a price rally to the same extent after rising 7%. It also noted that prices for key battery metals have continued to increase as strong demand outpaces supply.

Rio added: “Lithium carbonate prices have more than doubled in the first quarter and seen a six-fold increase year-on-year. Nevertheless, mine supply growth should pick up due to the ramp up of idled mine capacity and new projects coming online, especially in Australia.”

Other mining stocks under pressure today included Egypt-focused gold miner Centamin (LSE:CEY), despite reiterating its full-year production guidance. The weaker first quarter performance had been flagged in advance as the company completed the transition to owner-operated underground mining, but the FTSE 250-listed shares still fell 7.5p to 89.76p.