Berenberg downgrades Rio Tinto to 'hold', cites steel demand headlines

Berenberg said following the release of Rio Tinto's first-quarter results, it had chosen to downgrade the stock and reduce its price target to 6,500.0p, implying an 11% upside.

While the analysts said the mining sector and Rio had "performed well" since its upgrade in January, recent statements from the Chinese government about the curtailing of steel production, weak demand, ongoing lockdowns in key steel-making hubs such as Tangshan, and a volatile local property sector, had led them to believe that while the iron ore market was likely to remain "fairly tight", mainly on the supply side, further price gains also appeared to be "unlikely" at this point.

As such, with an R2 of 0.71 to the iron ore price since the beginning of 2019, the German bank thinks that dampening sentiment from a demand standpoint will temper further gains in Rio shares, despite softer operational first-quarters from Rio Tinto and Vale, which have kept prices steady for now.

"Yesterday's share price reduction of 4.8% is a reflection of more conservative sentiment on China (plus a weak Q1), exacerbated by soft PMI data which showed a deterioration month on month for March; until there is more constructive rhetoric from China from an economic stimulus standpoint (an H2 theme depending on how GDP growth plays out over the summer), we think Rio offers limited share price upside," said Berenberg.