Rio rides the raw materials boom

Aug 29, 2008

More than doubled first-half revenues and pre-tax profits at Rio Tinto (LON:RIO) "is a combination of the same demand story – India and China – we've talked about in the past and continued supply constraints", said chief executive Tom Albanese. So it's no great surprise that the share price scarcely reacted, though investor attention was probably more focused on the decision of Australian regulators to allow China's state-owned Chinalco to snap up an 11% stake in Rio. That could block rival BHP Billiton's (LON:BLT) $150bn bid, which Albanese maintains undervalues his firm.

Yet while "there's absolutely no doubt that Rio is making the most of the present commodity boom", said The Daily Telegraph's Damien Reece, couldn't both firms do even better by joining together?

Will the boom last?

That depends on whether post-Olympics, Chinese demand 'decouples' from the West. And while Rio "shrugged off talk of an impending collapse in the commodity market, pointing to McKinsey research suggesting China will build up to 50,000 skyscrapers in the next 20 years, mining companies "have a strong vested interest in the decoupling theory as continued demand keeps share prices high and investors happy", said the Times' David Wighton.

Yet as David Prosser points out in The Independent, developing Asia has had to clamp down on inflation of late, which presages slower growth, so China's economy may not pick up so quickly after the Olympics as Rio expects. Its economy also depends on western demand, which is dwindling.

While the long-term trend for commodities looks intact as Asia continues to industrialise, the outlook over the next year or so is far from compelling.

Related articles

FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.