China’s stimulus actions boosted the mining commodity sector this week, which is great news for iron ore producers like Rio Tinto.
Shares in mining company Rio Tinto (RIO 4.55%) surged by 11.3% in the week to Friday morning. The move comes as China’s central bank injected liquidity into the banking system to stabilize the real estate market and help China hit its growth target of about 5% in 2024.
Rio Tinto and China
The miner operates from four product groups: iron ore, aluminum, copper, and minerals. Iron ore is by far Rio Tinto’s most important commodity and its use in the production of iron and steel means Rio Tinto’s prospects will always be guided by steel demand. That usually means demand from China. The country is the world’s manufacturing superpower, responsible for roughly half of global steel production and use. As such, it’s the swing factor determining iron ore demand.
About 24% of China’s steel demand comes from building and construction, with 17% from infrastructure and 30% from machinery. As such, when there are concerns over its real estate sector and industrial economy, the iron ore markets and Rio Tinto will face negative sentiment.
The weakness in its property market is more of a country-specific issue. Still, the sluggishness in its industrial sector in 2024 also comes down to weaker export demand due to a global slowdown in growth. But recent news from China’s central bank sent iron ore prices higher this week. In addition, copper prices moved sharply higher, benefiting copper miners like Freeport McMoRan.
Image source: Getty Images.
Will it last?
China’s stimulus comes at the right time and signals an intent by the government and central bank to hit its growth targets. With interest rates coming down in the U.S. and other parts of the world, global growth can improve, leading to higher demand for steel and, ultimately, Rio Tinto’s iron ore.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
