Rio Tinto halves dividend as profits squeezed by lower iron ore prices and higher costs

Rio Tinto (ASX: RIO) reported a steeper-than-expected drop in first-half profits amid a double whammy of falling iron ore prices and higher input costs.

Underlying profits tumbled -29% to US$8.9bn, in-line with the -24% year-on-year decline in iron ore prices. This reflected extended covid-related restrictions in China, which impacted demand for the steelmaking ingredient.

Hand-in-hand with falling profits, Rio Tinto slashed its dividend by -52% to US$2.67 per share. But both earnings and dividends remain high by historical standards, with the interim dividend still being the second-highest payout on record.

Rio Tinto faced tough pricing conditions, with movements in commodity prices driving a US$3.4bn decline in earnings compared to last year. Rising general price inflation and higher diesel prices shaved a further -US$560m off earnings compared with the first-half of 2021.

The half-year result was below Morgans expectations of US$9.18bn in underlying profits and a US$3.97 interim dividend. 

Medium-term optimism

Rio Tinto CEO Jakob Stausholm remained optimistic that China will bounce back in the medium term. 

"China has more means to fix their economy and that includes sorting out challenges that they have faced recently in the property market,” said Stausholm, adding that, “China will find solutions to the different parts of the economy.”  

Looking ahead

China's slowdown has been worse than anticipated amid the country's commitment to 'zero covid' and supply-chain related issues.

On Tuesday, the IMF downgraded its Chinese GDP outlook for 2022 to 3.3% - the slowest in more than four decades, excluding the pandemic. Further lockdowns and a deepening real estate crisis was to blame.

A troubled China will likely continue to place downward pressure on iron ore prices, which briefly traded below US$100 a tonne in mid July.

Still, China is trying to dig itself out of a growth glut, recently establishing a 50bn yuan fund to support struggling developers, raising 300bn yuan to finance infrastructure projects and front-loading next year's budget to this year.

Positive monetary and fiscal actions from China has helped stabilise iron ore prices around the US$100 level. But the Australian Government's commodity forecaster, the Office of the Chief Economist still expects iron ore prices to average around US$85 a tonne in 2023 and around US$70 a tonne by 2024.

Iron ore futures (Source: TradingView)