Rio Tinto logs 47% drop in profit due to commodities slump

The huge iron ore overcapacity has taken its toll on giant miner Rio Tinto (ASX: RIO) which reported a 47 percent decline in its profit because of the lower prices of commodities. On Wednesday, the second-biggest miner in Australia released its financial results which reported half-year earnings of US$1.56 billion (A$2.05 billion).

Reuters reports that the underlying earnings of Rio for the six months to June dipped from US$2.92 billion (A$3.83 billion) 12 months ago but still beats analysts’ forecast of US$1.46 billion (A$1.92 billion). Iron ore and copper missed forecasts, but gains in Rio’s aluminium business were higher than expectations.

It is the worst H1 underlying result for Rio in 12 years, although the giant miner record a net profit of US$1.71 billion (A$2.24 billion), substantially higher than the previous year’s US$806 million (A$1.06 billion), reports Wall Street Journal.

Rio Chief Executive Jean-Sebastien Jacques attributes the decline in prices of metals and bulk commodities to the credit-fueled bounce in China’s construction activity that is not sustainable. At the same time, the glut in iron-ore supply has squeezed the miner’s profit.

With China’s economic growth having been stabilised, Rio foresees slower and less commodity-intensive growth for Rio’s key market. Because of the subdued low-productivity growth pattern in the global economy, Jacques sees continued caution is necessary for the remaining two quarters of 2016.

He says Rio is on track to reduce costs by US$2 billion (A$2.62 billion) a year until December 2017. Jacques says Rio is applying the lessons it learnt not to overspend when commodity prices are high which results in overproduction and the market suffering a slump.

Because of the profit squeeze, Rio reduced its interim dividend to US$0.45 (A$0.59) from US$1.075 (A$1.41) a year ago.

VIDEO: Rio Tinto 2016 half year results

Source: Rio Tinto