Liberum downgrades Rio Tinto as steel and iron ore prices falter

The brokerage noted that Rio shares have bounced back 10% from their September lows following a third-quarter revival in Chinese steel and benchmark iron ore prices. However, steel prices are now faltering and mill profitability is declining.

Liberum said demand weakness looks set to continue based on its analysis of previous credit cycles, confirmed yesterday by another weak print of Chinese credit growth. Chinese exports of aluminium are also rising as domestic demand slows, putting pressure on prices.

"Our base case is that demand weakness will continue to erode Chinese steel mill profitability and ultimately drive iron ore grade premiums lower - the relationship between these two factors has remained broadly intact throughout this cycle, although this is dislocating again now.

"Continued weakness in spot mill profitability in China should see prices for benchmark (62%) and premium grades (65%) of iron ore move back towards lower (58%) grades, currently $52/t. The growth in higher grade and lower alumina volumes form the S11D ramp-up and the resumption of Minas Rio at the end of the year should aid in this process."

At 1330 GMT, the shares were down 3.6% to 3,706p.