Higher Q3 Iron Output Weighs on Rio Tinto and its ETFs

Rio Tinto plc (RIO) released its production report for the third quarter that failed to cheer investors.
 
Production from the world’s second largest iron ore producer and exporter jumped 12% year over year and 8% quarter over quarter to 86.1 million tons thanks to the Pilbara mine in Western Australia. With this, Rio Tinto is on track to produce 340 million tons of iron ore globally this year. Global iron ore shipments came in at 91.3 million tons in the third quarter, up 17% from the year-ago quarter (read: What is in Store for Industrial Metal ETFs After China Rout?).
 
Meanwhile, copper production dropped 24% year over year to 115,800 tons due to maintenance of Utah’s Bingham Canyon. As a result, Rio Tinto reduced its copper production forecast from 500,000–535,000 tons to 510,000 tons for the full year.
 
Market Impact
 
The news of higher output has spread negative sentiments in the iron ore commodity market, as rising output will only add to the global supply glut of the steelmaking material and further weigh on the iron ore prices, which has already dropped over 70% from a 2011 peak. This is especially true as steel consumption is declining due to the slowdown in the emerging and developing economies, particularly in China.
 
As per the World Steel Association, the global demand for steel is expected to drop 1.7% this year after growth of 0.7% last year. However, demand is again likely to see growth of 0.7% next year. Weak demand coupled with excessive supply will continue to weigh on the price of iron ore.
 
As a result, shares of the Anglo Australian miner fell sharply by 2.2% on NYSE in the Friday trading session on elevated volume. The sluggish trading of the stock has put downward pressure on the materials’ ETFs that are heavily invested in this mining giant. This trend is likely to continue as Rio Tinto has a Zacks Rank #3 (Hold) and a poor Zacks Industry Rank of 191, which underscores a negative industry outlook.
 
Further, the stock has fallen 16.7% in the year-to-date time frame compared to the loss of 1.2% for the S&P 500 index and 4.4% for the materials’ sector. This suggests that more pain is in store for the company and the related ETFs in the coming days.
 
Below, we have highlighted two ETFs with the highest allocation to Rio Tinto that are in focus following the company’s Q3 production report (see: all the Materials ETFs here).
 
Market Vectors Steel ETF (SLX)
 
The fund tracks the NYSE Arca Steel Index, holding 26 securities in its basket. Out of these, Rio Tinto takes the top spot with 13.8% share. The product has diverse exposure across market spectrums with 37% in small caps, 32% in large caps and the rest in mid caps. In terms of country allocation, America dominates the fund’s returns at 40.1%, followed by Brazil (18.8%) and United Kingdom (13.8%). The ETF has amassed $65.1 million in its asset base while trades in lower volume of roughly 37,000 shares a day on average. The product charges 55 bps in fees and expenses from investors and shed 1.1% on the day. SLX is down 28% in the year-to-date time frame.
 
First Trust ISE Global Copper Index Fund (CU)
 
This product provides global exposure to the copper mining industry, such as copper mining, refining or exploration, by tracking the ISE Global Copper Index. In total, the fund holds 22 stocks with RIO taking the third spot with 7.3%. The ETF is invested across all market spectrums, with 38% going to small caps, 30% to large caps and the rest to mid caps.

Here, the Canadian firms take the top spot with 30.6% of the portfolio while United Kingdom and Australia round off the top three. CU has managed $15.8 million in its asset base and charges 70 bps in fees per year from investors. Volume is paltry at about 18,000 shares. The fund has lost 2.9% on the day and was down 24.3% so far in the year (read: No Gains on Chile for Copper ETFs; Global Ills Spoil Sport).
 
Bottom Line
 
While the above-mentioned products have performed badly from a year-to-date look and this trend is likely to continue given the continued oversupply of the steel making product, investors should note that these funds can easily counter shocks from a specific corner of the space or some of the industry’s biggest components based on their diversity.
 
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MKT VEC-STEEL (SLX): ETF Research Reports
 
RIO TINTO-ADR (RIO): Free Stock Analysis Report
 
FT-ISE GLBL COP (CU): ETF Research Reports
 
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